Moving averages

Moving averages (Moving average)

Moving averages.

Moving average value (HS) belongs to the category of analytic tools that follow the trend. Its purpose is to determine the start time for the new trend, but also warn of its completion, or a turn. SS are designed to track trends in their development, they can be considered as a curved trendline. But CC is not intended to predict movements in the market in the sense that it makes the graphical analysis, as it always follows the market dynamics, rather than ahead of it. This figure does not forecast price movements, but only reacts to it. He always follows the movements of prices in the market and signals the beginning of a new trend, but only after it appeared.

Construction of CC is a special method of smoothing prices. Indeed, when averaging the price indices of the curve is noticeably softened, and the trend of the market has become much easier. However, by their nature, like the HS is behind the market. Short-term HS accurately the movement of prices, longer than the longest CC. The use of short HS reduces lag time, but completely remove it by using the HS is not possible. On the market side better to use short-MOP, and trend in the effective length is less sensitive.

Type SS There are three types of MOP: MOP simple, weighted and exponential MOP MOP.

A simple moving average. Simple CC, or the arithmetic mean of the value calculated by the following formula:

where Ri-price i-th day, n-order moving average.

This type of CC is widely used by technical analysts'. But some analysts challenged his dignity, while putting forward two main arguments. The first is that the analysis takes into account only the period of time, which is covered by the CC. The second argument is that the mere fact equalized CC-biggest price of each day. For example, when using a rolling ten middle, last and first day is given equal weight ¾ 10%, like all other days of the period. Five HS, in turn, implies that the average weight of price is equal to 20%. At the same time, some analysts believe that later in prices should be given a few more important. This argument is quite logical because the new trend simply need a SS more time to turn and alarm than the weighted MOP considered below.

Weighted moving average. In order to solve such as the issue of "weight" averages of the prices, some analysts use the weighted moving average (BCC). They are calculated using the following formula:

where Wi-weight of i-component (the price).

Weights prisvaemye price in the above formula can be chosen arbitrarily. Generally, the choice of weights in prices depends on the nature of the dynamics of the investigated security. The weights may grow linearly, exponentially or in any other way. In the case of a linearly-weighted SS Wi = i.

The exponential moving average.

The exponential moving average (ESS) has a more complicated construction than simple CC or BCC, which allows the ESS to eliminate two disadvantages of a simple CC. First, the ESS gives a much more important indicators of recent days. Therefore, it is balanced. But, while the previous price is given less weight in the calculation used data on prices ¾ for the entire period of validity of the securities market. The formula for calculating this type of CC is more complex and is as follows:

where t-present, t-1 yesterday, k = 2 / (n +1), where n ¾ SS procedure.

Despite the fact that ESS does not have the shortcomings of the simple HS, it is not the best of the three HS. The following will be shown through testing the effectiveness of each CC.

Rules for analysis. General rules for the analysis of SS were as follows:

1. The most important signal, indicating the direction of the trend is the general direction of movement of the HS. When ascending the HS need to adhere to bovine market bullish. It is to buy when prices fall to CC, placing a protective suspension following the recent bottom, and pull it as soon as prices closed above the previous level. In descending MOP should play for a fall, opening a short position when prices podskochat to MOP or slightly above. In this case, the protective suspension should be placed slightly higher than the previous crest and dynamically pull it if you continue Bear trend.

2. The second signal is the intersection of the SS and the schedule price. This is a strong signal for bovine emerging markets, where prices are MOP crosses schedule above, without a positive slope, and the schedule of prices is also a large positive slope. In the case of suppression of the HS and the price schedule with a negative inclination of the first and a weak positive or negative inclination of the second, served more than a weak signal in the bullish trend is emerging, and it should get a confirmation from future additional signal. For emerging market Bear received similar signals from the opposite position and inclination of the HS and the schedule price.

3. The third is the turn signal SS to a minimum or maximum value. If the MOP is a schedule of prices and has a local minimum, a schedule of prices has a positive slope, the average signal strength of the bull market and the direction of opening up the position, but if the schedule does not have a positive slope, then comes a very weak signal, to confirm that need to use three additional signals.

These rules can be guided, at the market trend. In the market without a corresponding trend graphs would have Brains. Attempting to filter out these purely mechanical Brains leads typically to a loss and a useful signal.

Using several SS

To determine the plausibility of signals from CC, traders and analysts use both a combination of two or more lines of the HS. Some traders use in the analysis of one-day schedules of the combination of HS-order 5-21 or 5-13-21. In the general case, the line should provide short, medium and long term. At the same time there are such rules:

1. In absolute bull market of the most sensitive (short) line of HS is higher, but the most coarse (long) below the rest of us. In the bear market of the reverse pattern.

2. By crossing the lines can be seen to change the trend. Initially, cross the line more sensitive, followed in ascending order of more and more serious. In accordance with the line orders are crossed and how to change their relative position, it is possible to judge what is the trend, short-term or long-term change of direction.

Regulation analysis of two SS are similar to the rules of the analysis of a CC. By analysis of two secondary rules are the following:

# The point of intersection of the SS signal spread trend.

# Points of greatest divergence MOP talk of a possible imminent change of trend.

# The general direction of two MOP describes the current trend line, the MOP will be slow to show the desired direction, but more rapid ¾ signals to buy or sell a specific direction.

Trading system based on the two SS

By themselves, the two SS can work as an autonomous trading system with independent signals. There trading system based on two HS, working on the "double-crossing." The essence of this method is that the signals for buying and selling are served after a short line crosses the long-MOP MOP. In the case where a short line crosses the long HS HS bottom-up signal the beginning of bovine trend and the system for purchase orders. When short-MOP crosses the long downward signal a change in the bearish trend bovine and the system orders at the sale. This method assumes a continuous system, ie, assumes the continued availability of open positions ¾ long or short. If you are using two SS behind the evolution of prices will be slightly higher than in the case of a single SS, from this point of view, the two signals SS will be delayed compared with SS and one of the possible gains would be lost, although in this case, there is fewer false alarms. This trading system, like all the trend indicators to make better use of market trend, as a side trend system will give many false signals and would be unprofitable.

The second trading system based on two CC can provide a more simple tones. The second method of the simultaneous application of two HS space between them is seen as a sort of neutral zone. Closing price, fixed above the two lines, gives the signal for the opening of long positions if the price is fixed below the closure of both SS ¾ signal to the game for a fall. The above signals are canceled, if the closing price provided in the neutral zone. If prices are in a neutral space between the two CC, all short positions should be closed and further action should be to abstain. The advantage of this system is that it is not in the market constantly. This trading system, like the previous ones, is to market trend and use it to bestrendovyh market is not desirable.