Moving Average*
- It depicts the average value of the security's prices over a period of time.
- It helps in determining the underlying trend, by smoothing the fluctuation of erratic price movements.
- Its changes as security prices goes up and down.
- It is a wonderful tool to be used in market analysis.
- It can be calculated on any series & length of data/Prices.
- The longer the period, the average will be more smoother & gentle.
- It tracks the prices momentum of the security.
- It is a lagging indicator it cannot get you to the exact bottom or exact top, it gives signal only when bottom or top has already been made.
- The length of the moving average should be in consistency or should fit into the market cycle , one wish to be followed.
- It can also be calculated & plotted on indicators as with the prices.
Steven B. Achelis wrote in his book Technical Analysis from A to Z "The most popular method of interpreting the moving average is to compare the relationship between the moving average of the security price , with the price of the security itself."
Entry & Exit Signal for trading
- Buy Signal = When prices rises above its moving average.
- Sell Signal = When prices fall below its moving average.
Cross Overs
- Golden Cross( Buy Signal) = When short term moving average crosses from below the long term moving average.
- Dead Cross ( Sell Signal ) = When short term moving average crosses from above the long term moving average.
Types of Moving Averages
- Simple Moving Average - It gives equal weightage to prices.
- Exponential Moving Average - It gives more weightage to recent prices.
- Weighted Moving Average - It gives more weightage to recent prices.
- Triangular Moving Average - It gives more weightage to prices in the middle of the prices over a period of time.
- Variable Moving Average - It gives weightage based on the volatility of prices.
Most Common Moving Averages
- 10 Day
- 30 Day
- 50 Day
- 100 Day
- 200 Day
- 65 Day moving Average is most Popular amongst Future Traders.
Relevance of Moving Averages in terms of Depicting Trend
- 20 DAY - It depicts Short Term Trend
- 50 DAY- It depicts Intermediate Trend
- 200 DAY - It depicts Long Term Trend
* This knowledge is extracted from several books for learning purpose., nothing herein is for commercial use.
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