Lecture Notes: Trading Strategies and Moving Averages

Key Concepts

• 20 Period Moving Average (MA): A key technical indicator used in trading, representing the average stock price over the last 20 periods.
• 50% Rule: A trading rule that suggests not taking trades if the price movement violates a 50% retracement level.
• Dead Cat Bounce: A term used to describe a short-lived recovery of asset prices after a significant drop.

Trading with the 20 Period MA

• Question: Should you trade close to the 20 period MA if it violates the 50% rule?
  • Answer: It is a lower odds play because:
    • The drop to the 20 period MA is too deep, making it harder for the stock to reach new highs.
    • The bigger the drop, the greater the odds of the bounce failing.

Analogies Used

• Wall Climbing Analogy:
  • Small walls are easier to climb (small price retracements are better).
  • Large walls are difficult to climb (large price retracements are risky).
• Ball Dropping Analogy:
  • A ball dropped from a high building floor (e.g., 40th floor) has low odds of bouncing back to the top.
  • A ball dropped from a low building (e.g., 2nd floor) might bounce higher.
• Dead Cat Bounce:
  • Represents a failed attempt of recovery after a significant drop.
  • A large drop followed by a short bounce that fails to recover.
  • Example: A cat dropped from a tall building bounces on impact, but it doesn't mean recovery.

Trading Strategies

• Controlled Pullbacks:
  • Prefer gliding rather than sharp declines for potential buy-ins.
  • Sharp declines often lead to failed secondary attempts, but the second attempt can succeed.
• Separation from the 20 Period MA:
  • Separation from the 20 period moving average can indicate a profit-taking surge.
• Time and Space Concept:
  • Time: Duration of the trend.
  • Space: Distance from the key moving average.
  • Optimal Shorting: Occurs when there is both time and space in a trend.
  • Time and space should be relatively equal for a better chance of successfully timing trades.