One of the most rewarding experiences for a trader is when you can latch onto a long-term trend.

If you time it right, it’s the sort of thing that can really grow your trading account… and your confidence.

When you see that a stock (or index) is trending, though, the challenge is trying to decide when to make your trade entry.

And often that becomes an emotional battle…

Each day it rallies higher, and your desire to jump in only grows stronger. You think that by sitting on the sidelines, you’re missing out on big potential gains.

However, as we’ve discussed previously, markets don’t move in straight lines. A trend can have plenty of countermoves along the way.

Meaning, that if you follow your emotion and jump straight in, that stock (or index) might soon roll over, putting you in a losing position.

To avoid this, I use technical analysis… Not only does it help determine entry and exit points, it also keeps the emotion out of my trading.

To show what I mean, let’s pull up a chart of the S&P 500 index (SPX)…

SPX Daily Price Chart

Source: eSignal

The chart shows a 50-day moving average (MA), represented by the blue line. This 50-day MA – one of the most commonly used time intervals – shows the long-term trend.

As the blue line shows, the S&P 500 has been in a clear uptrend. It’s evident that despite being in an uptrend, it’s had plenty of pullbacks along the way.

Had you just jumped in and bought SPX on pure emotion, there are plenty of times where your position would have almost immediately turned into a loss.

Buying into a long-term uptrend, only to sell out for a loss, can be one of the most frustrating things in trading.

To try and avoid this scenario, I use the 50-day MA. To see why, let’s concentrate on the SPX’s price action in relation to the 50-day MA…

I’ve numbered points on the chart (1-8) where the SPX intercepts the blue 50-day MA.

In all but one occasion (number 2), the SPX bounced higher after touching the blue line. Even when the SPX traded below the blue line, it still rallied higher, though just delayed by a couple of days.

There’s a reason for this… and it comes back to that 50-day MA.

Traders (and investors too) usually watch the 50-day MA like a hawk. They’re watching it to see if the stock price (or index level) will hold the blue line.

If it doesn’t hold, then they know that a change in trend could be on the cards.

Either way, it gives traders the potential to trade (and profit) in either direction… that’s why they watch it so closely.

You can see how quickly SPX has rallied after touching the blue line. Seven out of eight times, it brought a new wave of buying into the market.

If you were looking to go long SPX, you can see how this simple pattern – a bounce off the 50-day MA – could be a strong entry point.

Like any indicator, this won’t work 100% of the time. Nothing in the markets does.

What it does, though, is increase your chance of making a profitable trade. And just as importantly, help take some of the emotion out of your trading.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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