How do moving averages help a spread better?

Moving averages are widely used by spread betters to find trends in the markets. Tim Bennett explains what they are and how you can profit from them in your own spread betting trades.

One of the keys to successful spread betting is to spot a trend and get in on it early. There are plenty of tools around designed to do just that. Moving averages (MA) are one of the most straightforward but also heavily used. Here's how they work and a snapshot of what they can reveal.

First off, the basics. Suppose you havefive index points for the FTSE 100 the closing prices over the previous five days. These are 5,850, 5,900, 5,920, 5,905 and 5,870. The average is 5,889 (the five added up and divided by five). Today, let's say the index closes at 5,880. The new average using the last five prices is 5,900+5,920+5,905+5,870+5,880, all divided by five, so 5,895.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The advantage of a moving average is it reveals a trend (mildly bullish, since 5,895 is above 5,889) which can be otherwise hidden by daily fluctuations. Clearly, a five-day average is quite short-term so unsurprisingly there are also 50-day and 200-day averages available for indices such as the FTSE 100 and S&P500. Once you have say a 50-day and a 200-day moving average you can start to discern turning points.

For example, a rising 50-day moving average cutting up through a falling 200-day is often a bullish signal as, combined with, say, rising buying volume, it suggests the market is turning up. Equally, if the 50-day cuts down through a rising 200-day average it can suggest a bearish turning point has been reached.

Advertisement - Article continues below

Two moving averages can be summarised into a moving average convergence divergence number (MACD). Typically, a longer term moving average is deducted from a short term moving average to give a single figure. Again, a positive gap (so the short term average is above the long term average) can indicate a bullish turning point in a bear market, or that the security in question has been overbought short term in a bull market. If they sound like polar opposites they are! As always, interpretation is key when using any momentum indicator. For more examples, see my colleague John C Burford's spread bettingblog.



Investment strategy

Buying shares can be a tricky business

A tip gone bad reminds John Stepek that buying shares in troubled companies in the hope that they can turn themselves around doesn't always pay off.
16 Jan 2020

Investment trusts: the Cinderella of investment arrives at the ball

Investors should look beyond the market noise of a single year and examine the bigger picture. Max King explains what we can learn from 25 years of in…
8 Jan 2020
Stock markets

The boom in passive investing won’t cause the next crash

Passive investment funds such as ETFs are now such a fundamental part of financial markets that some people worry that they will spark the next crash.…
7 Jan 2020
Investment strategy

Running with the crowd is bad for your finances – here’s how to resist it

To be a good contrarian investor, you have to avoid being swayed by the crowd. John Stepek explains how to go about it.
3 Jan 2020

Most Popular


Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020