MOVING AVERAGES

MOVING AVERAGE METHOD IS THE MOST WIDELY USED METHOD OF IDENTIFYING TREND REVERSAL SINCE THEY DO A GOOD JOB ATROUNDING UP THE FLUCTUATIONS SO THE TRADERS AND INVESTORSCAN GET A CLEARER VIEW OF THE UNDERLYING TREND.

A MOVING AVERAGE IS CONSTRUCTED BY SMOOTHING A PRICE DATA

•EQUAL WEIGHT TO EACH PIECE OF DATA•DAILY AND WEEKLY CHARTS

•MORE WEIGHT TO THE MOST RECENT DATA•DATA MUCH MORE SENSITIVE TO PRICE CHANGES

SIMPLE MOVING AVERAGE

SIMPLE MOVING AVERAGES ARE CONSTRUCTED BY TOTALING A SERIESOF DATA AND DIVIDING THE TOTAL BY THE NUMBER OF OBSERVATIONS

NOTICE HOW THE « MA » REVERSES DIRECTION WAY AFTERITS LOW.

BULLISH SIGNAL: CROSSES ABOVE THE MA

BEARISH SIGNAL : CROSSES BELOW THE MA

THE CHOICE OF TIME SPAN IS CRITICAL WHEN EMPLOYING MOVINGAVERAGES TECHNIQUES

FIRST STEP IS TO DETERMINE WHICH TREND YOU ARE TRYING TO IDENTIFY:SHORT-TERM, INTERMEDIATE OR LONG

DON’T GO FOR THE PERFECTION THAT CANNOT BE ACHIEVED. INSTEAD,LOOK FOR A TIME SPAN THAT WORKS RELATIVELY WELL OVER MOST MARKETS.

A MOVING AVERAGE IS JUST ANOTHER TOOLS OF TECHNICAL ANALYSIS.USE IT ALONG WITH OTHERS LIKE TRENDLINES, PATTERNS ETC…

ONLY 3 SAD FACES WHEN USING 25-DAY MOVING AVERAGE !

Ford

                                                                                                                                

MA DOES NOT WORKIN SIDEWAYS ACTION

3M

                                                                                                                                

AOL

                                                                                                                                

RULES FOR INTERPRETINGMOVING AVERAGES

1. WHAT CONSTITUTES A VALID CROOSOVER ?

2. MOVING AVERAGES REPRESENT DYNAMIC SUPPORT AND RESISTANCE LEVELS.

3. THE LONGER THE TIME SPAN OF A MOVING AVERAGE, THE GREATER THE SIGNIFICANCE OF THE CROSSOVER.

4. CROSSOVER OF SHARPLY RISING OR FALLING AVERAGES ARE MORE LIKELY TO BEWHIPSAWS

5. REVERSAL IN THE DIRECTION OF THE MOVING AVERAGE ARE MORE RELIABLE THANCROSSOVERS

1. WHAT CONSTITUTES A VALID CROSSOVER ?

IMPOSSIBLE TO USE THIS 3% RULE FOR DAY TRADING !

SHORT-TERM TRADERS ARE HAPPY WITH 3% PROFITSSO THIS RULE IS NO GOOD FOR THEM !!

COMBINATION OF TREND LINES AND MOVING AVERAGE

POINT 2 SEEMED LIKE A CLEAR CROSSOVER…WHY NOT ?

TREND LINES HAVE MORE WEIGHT THAN MOVING AVERAGES

THESE CHARTS AND MOVING AVERAGES ARE BASED ON CLOSING PRICESBECAUSE CLOSING PRICES REFLECT POSITIONS THAT TRADERS ARE WILLINGTO TAKE HOME OVERNIGHT OR OVER THE WEEKEND.

CLOSING PRICES GENERALLY REPRESENT A BETTER REFLECTION OF THEUNDERLYING TREND THAN EXTREME INTRADAY POINTS.

2. MOVING AVERAGES REPRESENT DYNAMIC SUPPORT AND RESISTANCE LEVELS

THE MORE OFTEN A MA LINE COMES CLOSE TO THE CHART LINE, THE MORE EFFICIENT THE TREND REVERSAL SIGNAL.

PENETRATION OF FLAT AVERAGES ARE MORE LIKELY TO BE VALID THEN SHARP ONES.

resistance

DURING CONSOLIDATION PHASES, MA DO NOT WORK …

5. REVERSAL IN THE DIRECTION OF THE MOVING AVERAGE ARE MORE RELIABLE THAN CROSSOVERS

CLEAR DIRECTIONAL CHANGE AT THE OCT 87 CRASH.GREEN LINE SHOWS THE BEGINNING OF A NEW DIRECTIONAL CHANGE

REVERSAL COMES AFTER THE FACT

ADV/DISADVT. OF MOVING AVERAGES

1. LAGGING INDICATORS

2. NOT VALID IN SIDEWAYS MARKET

3. BEST IN TRENDING MARKETS

4. YOU WILL NEVER GET IN AT THE BOTTOM AND OUT AT THE TOP

USES OF MOVING AVERAGES

• TREND IDENTIFICATION/ CONFIRMATION

• SUPPORT AND RESISTANCE LEVEL IDENTIFICATION

• TRADING SYSTEM

EXPONENTIAL MOVING AVERAGE

EMA ARE CALCULATED BY MULTIPLYING THE DIFFERENCE BETWEENTODAY’S PRICE AND AND A MOVING AVERAGE BY AN EXPONENT.THE VALUE OF THE EXPONENT VARIES WITH THE CHOSEN TIME SPAN.

AN EMA IS MORE SENSITIVE AND REVERSES DIRECTION AHEAD OF A SIMPLEMOVING AVERAGE OF THE SAME TIME SPAN.

BECAUSE IT IS MORE SENSITIVE, IT IS MORE SUBJECT TO WHIPSAWS

ENVELOPES

BOLLINGER BANDS

BOLLINGER BANDS ARE PLOTTED AT STANDARDDEVIATION ABOVE AND BELOW A MOVING AVERAGE

STANDARD DEVIATION = VOLATILITY

MORE ABRUPT MOVES WITH BOLLINGER BAND