MOVING AVERAGE

Moving Average



Moving Average

Moving Average

We all know the trading clichés: buy low and sell high, take losses quickly and let profits run, fear and greed will ruin your trading, etc. It's easy to look at a chart and recognize that if you had bought at the low and sold at the high, you would have made a bundle. Hindsight is wonderful. In our never-ending quest to find the perfect trading tool, we sometimes overlook simple ones.

A trend-following system is a viable approach to adhere to all of these principles— buying low, selling high and letting your profits run. The most common tool for trend following is the moving average. It's where most beginners begin, and it's where we can start to develop a better understanding of market analysis.

All technical trading is built on statistics, which is essentially nothing more than a combination of probability and arithmetic (Box, 2004).

The moving average is a trend-following system that is easy to build and maintain. The simplest use is to buy when price crosses above the moving average and to sell when it crosses below. By definition, you will capture a portion of all trends, but you'll also miss the beginning and suffer through a number of false positives when no trend ultimately develops.

A moving average is simply the average value of data over a specific time period. Analysts use it to figure out whether the price of a stock or a commodity is trending up or down. It effectively "smooths out" the daily fluctuations to provide a more objective way to view a market.

Although simple to construct, moving averages are dynamic tools, because you can choose which data points and time periods to use to build them. For instance, you can choose to use the open, high, low, close or midpoint of a trading range and then study that moving average over a time period, from tick data to monthly price data or longer.

Moving Averages can help you identify the trend in a market, which is important since we all know that the trend is your friend. Yet certain moving averages can serve as support or resistance, and also alert you to trading opportunities.

A moving average signifies when and where a trend is about to start or to end. A trend basically represents a situation when a price carries on moving in one direction. The up-trend (bullish trend) occurs when prices start moving upward. The down-trend (bearish trend) occurs when prices start moving downwards. Whereas, a side-ways trend is when a price is moving side sideways. It is necessary to understand the concept that the prices move in a straight line very rarely, and that is the reason why the moving average graphs and charts help the trader recognize a trend.

There are three types of moving average:

the simple moving average

the exponential moving average

the linear moving average

Simple Moving Average

A SMA is calculated by adding up the closing prices of the investment for a number of historical time periods and then dividing the total ...