When it comes to moving averages, the 50 day moving average is considered to be the most effective at telling traders what they want to know. It’s very easy to use this number though and have no idea how to use it correctly. However, when it’s used correctly, it is powerful, simply because everyone else uses this number. Here, we will show you the correct way to look at 50 day moving averages, and how to apply it toward effective put options.
Applying the 50 Day Moving Average
First, there’s some background that you need to know about how markets react. Because you are an advanced trader, you probably already know this, but it’s still worth mentioning. The asset, regardless of what it is, is likely to have previously established boundaries set in place, commonly referred to as resistance and support lines. These are the price levels that the asset has historically had difficulty moving beyond, for some period of time.
What you are looking for is an asset that is still within its normal trading range, but has recently had a large drop in price and has weak fundamentals. When this is discovered, you should be looking at the 50 day moving average next, and looking to make sure that it has been breached above that level at least three times since the drop in price. This works best if you are swing trading, but it can be altered to fit a model based on day trades or position trades. The key thing to remember is that the more times that an asset has tried to move above the 50 day moving average without meeting lasting success, the more likely a severe drop is in place. Doing this with one or two pushes above that number isn’t enough to push the odds in your favor. This doesn’t happen until the third time. If you can find one that’s done this four times, your odds of success will go up even more heavily.
The goal is to open up a put binary option at as close to the peak of the third push above the moving average as possible. This will be impossible to time perfectly, but you can get a decent idea of what will happen by looking at the previous moves above that average line.
You need to be patient with this strategy. If you take out a 60 second option, it’s unlikely to work. Even a one-hour option has a low probability of success. You want to time this for at least three hours in order to give yourself a fighting chance here. Pushing it out for a few days is even better. For this reason, many traders have issues, even if it is a pretty simple approach. It just requires a lot of patience, so it’s often best to use this strategy in combination with a shorter term approach so that there is an extra element of diversity added to your trading and your profit making ability. You can jump into short term put binaries once the decline has begun, if you want to stick with just one overall strategy or method.
Things Can Go South
The big drawback of using this strategy is that it is most heavily used with stocks, and your ability to generate profits with this is based upon the predictability that comes with this. It also is not an exact science. Statistics say that the more often a weak company pushes above a moving average, only to come falling down afterward in a short period of time, the more likely a big, sustained drop becomes, but that doesn’t mean that it will happen with every stock, or whichever other type of asset you are looking at. As long as the fundamentals for the asset are weak, though, the better your success rate should be.
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