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FAQs Frequently Asked Questions

Market Lab Report
What about using the 20-day moving average (20dma) as a selling guide?

Q: PCLN is a name that you have discussed in your Pocket Pivot Review (PPR) before.

From the looks of it, it has held the 20dma since July 2010, thus has qualified as more than 7 weeks. The 10dma has not shown to be a place of support. The 20dma also served as support during previous ascents in late 2009 and early 2010. Considering this, would you consider the 20dma to be the "violation" sell signal vs. the 10dma or 50dma? Obviously we would need a close below the 20dma first (assuming today), then a move below today's low.


A: I dont use the 20dma, but some do with good success. Whichever moving average you choose to use, make sure you've studied it well enough to create rules around it, and that it fits your risk tolerance levels/investment style. Some investors have longer time horizons and prefer lower turnovers so prefer to use the 50dma exclusively. Other investors are faster traders so prefer to use the 10dma exclusively. In our book, we mention our style which uses both the 10dma and 50dma as sell guides, depending on how the stock trades. The important message is that each investor, regardless of which moving average or averages they choose to use, know how stocks trade around their selected moving average so they can create a set of logical rules that works for their trading style.

That said, using the 20dma in the manner of which you speak could certainly work. My own style, which may be different from yours, would be to either a) hold the whole position or sell it down to a smaller position and use the 50dma as my selling guide, or b) sell it out completely should the general market weaken - and this could occur even if my model remains on a buy or switches to a neutral signal.

First published: 4 Oct 2010
Last updated: 4 Oct 2010