A Simple Money Management Idea for Stock Traders

I stumbled across the chart below while hanging out on stocktwits a few months ago. It is a monthly chart of the S&P 500 with a 10 month EMA (exponential moving average).   We could have made a boat load of money simply by going long when the S&P 500 is above the moving average and going short or to cash when it is below.

spx-0509monthly

My eyes lit up when I first saw this chart.  However, the problem with moving averages is that they always lag at the turn. If we were waiting on the S&P 500 to move above the 10 month EMA, to go long, we would have missed the current move off the bottom.  I believe a better way to use this indicator is as a guide for money management.

Last year we did a great job navigating our subscribers through a most brutal market.  Our portfolio was down -8% vs. -40% for the market.  I recall every time I felt the worst had past and added one more long position – the market took another nasty spill.  What if I had simply had a rule that whenever the S&P 500 was below the 10 month EMA – to maintain a cash position of X%.

I have no way to measure how much a  rule like that would have improved my performance, but I am quite certain it would have.  I joked about an upcoming throttling too many times for it not to have helped.

Check me out on the twitter.  I use it mostly to talk about stocks.  You can find me at www.twitter.com/TrendRida

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  • Interesting. I used the 10 month EMA for several stocks I’m following. The indicator shows most of the stocks are above the 10 month EMA. Perhaps we are in a new bull market, and I’m too cynical to believe it 🙂

  • I understand where you are coming from – we all fight with ourselves. However, the best traders trade what they see not what they think.

  • SPY has been above it’s 10 month EMA since early September. And the majority of stocks I follow are above their 10 month EMA.

    Based on this indicator, I’ve started putting some of our cash back into equities. We’ll see how it turns out 🙂

  • Good luck, I think that you will be pleased. The key is to sell when your stock goes below the 10 month ema. As long as you protect your downside, the upside will take care of itself.

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