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At the end of the day, fundamental analysis is the study of companies – how much profit they made, their product lineup or services offerings, how much revenue they took in or lost, or the makeup of the management team, and so on and so on.
The fundamentals are important – they can tell you something about whether you want to own a piece of the company or whether you want to buy the stock.
It's also less than half the information you need to make a truly informed decision on whether not to fork over hard-earned dollars for shares, or "rent" some stock for a triple-digit trade.
But I'll be blunt: Fundamentals are the "low-hanging fruit," if you take my meaning. You can get fundamental analysis all day every day from the website, newspaper, or cable channel of your choice. Some of it is excellent, but some of it might as well have been pulled out of a hat.
Ask 10 different analysts which of the fundamentals should draw the most water in decision-making, and you'll get… well, between five and 10 different answers.
I'm not knocking fundamentals – they are very important – but it's technical analysis, or the study of stock prices, that gets you "all the way there." Technical analysis can mean the difference between success or failure.
Or, in my personal case, technical analysis meant the difference between being a guy who eats ramen noodle packets, drinks Natural Lite, and struggles to support a wife and new baby with food stamps… and a successful, millionaire trader.
I'll save the rags-to-riches story for a Markets Live streaming session someday – maybe.
Today, I want to show you one dead simple technical indicator you can use to take your decision-making – and thereby your success – to the next level…
I Went Through Years of Study, Trial, and Error – You Won't Have To
As I mentioned a minute ago, technical analysis looks at historical price movements to evaluate the strength or weakness of a security, so that you can take a long or short position.
Technical analysis is most effective in the short term.
It's a tricky world to navigate, I'm here to tell you. There are something like 75 different technical indicators out there – stochastics, Fibonacci retracement, Chaikin oscillators, Bollinger bands, chandelier exits, the vortex indicator, parabolic stop and reverse indicators, Pring's Special K, the ulcer index…
That's just off the top of my head. It goes on and on.
THIS GUY LOST EVERYTHING and fled to Thailand. Two years later, he had $5 million to play with, all because of this one strategy…
Don't be intimidated: If I can master those with hard work, anyone can. Besides, there's a handy shortcut that you can start using right away – as soon as you get to the bottom of this page.
It's a "trend line" indicator called the 50-day simple moving average. Sometimes you see it expressed as "MA50" in shorthand or on charts. It is super–important; it's the lifeblood of technical analysis. No other trend line embodies the old Wall Street adage, "The trend is your friend," quite like the good old MA50.
Understanding what the MA50 is trying to tell you can radically boost your success in trading, i.e., your profits.
With all that said, it's not exactly a one-way ticket on the express train to Profitsville, but for beginning (and even professional) investors and traders, studying the MA50 will get you most of the way there, in a much, much stronger position than if you were to rely on fundamentals alone.
You can calculate it with some middle-school math: You take the average of a stock's closing price over the last 50 days.
It could very well be easier than that. Many professional charting programs will calculate MA50 for you in a millisecond. You don't necessarily have to pay for it, either; some sites like Stockcharts.com have a ton of free tools for charting.
Below is a three-year daily chart of the S&P 500's 50-day moving average…
Years ago, I performed a laborious study of every single one of the 505 stocks on the S&P 500. (You read that right: The S&P 500 consists of 500 companies, but Google, Discovery, Fox News Corp., and Under Armour offer multiple classes of stock.)
So I studied the MA50 of all the stocks individually, unravelling the relationship of the MA50 trend line on each one.
My hard-won data helped me formulate one simple rule to remember:
When a stock's 50-day simple moving average (MA50) is rising, there is a 2:1 likelihood that the stock will move higher. Similarly, when the MA50 is trending lower, there's a 2:1 chance the next day's price will move lower.
When you're trying to determine whether to go long or short on a stock, that's invaluable information to have.
That knowledge made a huge difference for me. It helped turbocharge my trading and, in turn, radically impacted my life for the better.
In fact, I put my money where my mouth is: When I'm researching what I think could be a high-profit move for my Night Trader subscribers, I use many technical indicators, and the MA50 carries a lot of weight in my deliberations.
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About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Strikepoint Trader and contributes to Money Morning as the Quant Analysis Specialist.