Moving averages are one of the most popular and useful tools available to technical analysts. It smooths some of the price and facilitate the identification of the trend, which is especially useful for mobile markets. It also underpins many other technical indicators.
The two most popular types of moving averages - this is a simple Moving Average (SMA) and Exponential Moving Average (EMA).
Simple Moving Average (SMA)
Simple Moving Average is formed by calculating the average price of market-based instruments for the specified number of periods. Although it is possible to form a sliding average on the basis of price discovery, the maximum and minimum, most moving averages use the closing price. For example: the importance of 5-day simple moving average is calculated by summing the closing prices over the past 5 days and dividing the total by 5.
Calculation is repeated for each price bar on the graph. Then, average values are connected and form a smooth curve line - moving average line. We continue our example: if the next closing price equal to 15, then this new period will be added, and the first day for which the value is 10, will be deleted. The new value of 5-day simple moving average would be calculated as follows:
Over the past 2 days, SMA moved from 12 to 13. As new days are added, the past few days will retire, and Moving Average will continue to move forward. In the example above, using closing prices for Eastman Kodak (EK), the tenth day is the first day, when possible to calculate the value of 10-day simple moving average. Since the computation continues, a new day is added, and the earliest date retracted. Significance of 10-day SMA for the eleventh day is calculated by summing the price from 2 to the 11th day and dividing the sum by 10. Then the process of calculating the moving average for the next day, where the 10-day SMA for the 12-day price is calculated by summing the 3 rd to 12 th day and dividing the sum by 10.
The schedule above is a piece that reflects the consistent data from a table. Simple Moving Average starting with the 10 th day and continues on.
This simple example reflects the fact that all moving averages are indicators of delay and will always be "lag" on prices. EK price went down, but the simple Moving Average, which is based on data from the previous 10 days remained higher prices. If the price increased, SMA probably would have been lower. Since Moving averages are indicators of delay, they belong to the category of indicators following the trend. When prices are in trend, Moving averages work well. However, when prices are not in trend, Moving averages can file false alarms.
Exponential Moving Average (EMA)
To reduce the lag in simple moving averages, traders often use the Exponential Moving averages (also called "Moving averages weighted by the exponent). EMA reduces lag, giving more weight to recent prices on the earlier price. Given more weight to recent price depends on the period moving average. The shorter the period EMA, the more weight will be given to the most recent price. For example: 10-periodnaya Exponential Moving Average gives the most recent price of 18.18 weight%, while the 20-EMA periodnaya only 9.52%. As we shall see, EMA calculation more difficult than the calculation of SMA. It is important to remember that the Exponential Moving averages give greater weight to recent prices. Also, they will respond quickly to recent price changes than the simple moving average cost. Below is the formula for computing.
Computation of the exponential moving average
Exponential Moving averages can be defined in two ways - as an EMA-based EMA or as a percent based on the period. EMA is based on per cent per cent as its sole option, while the EMA is based on the period parameter, which represents the duration of EMA.
A formula for the exponential moving average:
EMA (current) = ((Price (current) - EMA (prev)) x multiplier) + EMA (prev)
For EMA, on the basis of per cent, "multiplier" is equal to the specified percentage of EMA.
For EMA, based on the period, "multiplier" is equal to 2 / (1 + N), where N - the specified number of periods.
For example, the multiplier from 10 EMA periods is calculated as follows:
This means that the EMA with 10 periods is equivalent to 18.18% EMA.
* Note: Some graphics programs support only on the basis of EMA period.
Below is a table with the results of calculating the exponential moving average for Eastman Kodak. For odnoperiodnoy exponential moving average was used Simple Moving Average as an exponential average the previous period (yellow allocated value for the 10th period). Since the 11 th period EMA using the previous period. Below is a calculation for the 11-second period:
1. (C - P) = (61.33 - 63.682) =- 2.352
2. (C - P) x K =- 2.352 x .181818 =- 0.4276
3. ((C - P) x K) + P =- 0.4276 + 63.682 = 63.254
* 10-periodnaya Simple Moving Average is used only for the first calculation. Then using the previous period EMA.
Please note that each previous closing price in a series of data used to calculate each value of EMA, which form the EMA line. While the impact of earlier data decreases over time, it never disappears entirely, regardless of the specified period EMA. The impact of earlier data is reduced for short EMA faster than that for long, but again, it never disappears completely.
Simple or Exponential
At first glance it seems that the difference between the exponential moving average and the simple moving average is minimal. For this example, which uses only 20 trading days, the differences are minimal, but nevertheless, it is. Exponential Moving Average steadily closer to the actual price. On average, EMA to 3 / 8 point closer to the actual cost than the SMA.
On the 10 th day 20 th day, EMA was closer to the price than the SMA in 9 of 10 times. Once SMA was closer to 18-second period (highlighted in yellow) and it is not long lasting. The average absolute difference between the exponential moving average and the current price of 1, a simple Moving Average had an average absolute difference - 1.33. This means that, on average, Exponential Moving Average was at 1 point above or below the current price, but just rolling average was 1.33 points higher or lower than current prices.
When EK stopped falling and began to haggle in the commercial field, SMA continued to decline. During this period SMA was closer to the actual price than EMA. EMA start to deviate from the actual price, and was farther from it. This occurred because the actual cost began to change direction. Due to its delay SMA continued to decline, and December 13, even addressed the actual price.
Comparison of 50-day EMA and 50-day SMA for Compaq also shows that the EMA follows the trend quicker than the SMA. The blue arrows mark the point when the action started a strong trend. Attaches more weight to recent prices, EMA reacted quicker than the SMA and remained closer to the actual price. The gray circle shows when the trend began to slow down and trade has moved into range. When there is a shift from the trend to trade in a range, SMA was closer to the price. As the band continued to trade in the second half of 1999., Moving averages, both agreed. At the end of 1999. Compaq began to build upward trend and the EMA to respond quickly to recent price changes, and remained close to the price.
Which is better?
Which Moving Average to use depends on your trading style and your preferences. Simple Moving Average is obviously lagging behind, but the Exponential Moving Average can be prone to more rapid breakthroughs. Some traders prefer to use Exponential Moving averages for shorter periods of time to display a more rapid change. Some investors prefer for long periods of Simple Moving averages to determine the long-term changes in trends. In addition, much will depend on the particular market instrument. 50-day SMA is better able to work in determining the levels of support for the Nasdaq, but the 100-day EMA may be better for the Dow Transports. Type of moving average and the time period will greatly depend on the particular market instrument and how it reacted in the past.
Some may seem that the higher sensitivity and earlier alerts have to be more profitable. This is not always accurate and has a big dilemma for the technical analyst: the choice between the sensitivity and reliability. The more susceptible indicator, the more signals it will bring. These signals may prove timely, but with increased sensitivity increases the number of false alarms. Less sensitive indicator gives smaller signals. However, less sensitivity leads to fewer but more reliable signals. Sometimes these signals can be delayed.
For moving averages, this raises the same dilemma. Shorter Moving averages are more sensitive and to cast more signals. EMA, which is generally more sensitive than the SMA, probably also will bring more signals. However, also will increase the number of false signals and rapid turn. Longer Moving averages will move slower and to cast fewer signals. These signals are likely to be more reliable, but they may also be delayed. Every investor or trader should experiment with different types and periods moving averages to determine the relationship between sensitivity and reliability of the signal.
The indicator follows the trend
Moving averages smooth consistency of price data and facilitate the definition of trend. As for the formation of moving averages of past price data are used, they believe, or delay for the trend following indicators. Moving averages will not prevent a change of trend, but rather to follow the current trend. Therefore, they are best suited to determine the trend and the goals associated with the current trend rather than to predict.
When to use
Since Moving averages are for the trend, they work best when the tool is in the market trend and are ineffective when the market moves in a shopping tool range. With this in mind, investors and traders should first identify the market-based instruments, which show signs of the trend, and then try to analyze them with the use of moving averages. This process should not be a scientific examination. Usually, a simple visual assessment of the price schedule will help determine whether market-based instruments has shown signs of the trend.
In its most simple form, the price of market-based instruments can only do one of three things: develop a trend upward, downward trend to develop and haggle in the price range. Ascending trend of development, when market-based instruments creates a series of higher highs and higher minima. Top-down trend is developing where the market-based instruments creates a series of lower minimums and lower highs. Trade in the price range may occur if market-based instruments can not ascending or descending trend. If market-based instruments traded in the price range, rising trend begins when breached the upper limit of the range, and top-down trend started when the broken lower limit.
In the case of Ford, it is clear that action can be found in the trend, and in the commercial range. The red circles indicate the stage of trade in a range that cyclical trend. Sometimes difficult to determine when the trend ends and begins trading in the range, or when trading in the range of stops and starts the development trend. Basic rules for the trend and trade in the ranges set forth above may be applied to Ford. Pay attention to the times of trading bands, breakthroughs (such as up and down) and periods of trends. Moving Average worked well in the trend, but it does not matter when trading in the range. Also note, as the Moving Average is late for the trend: it is always a price at the time of a rising trend and higher prices in the downstream. For this example use 50-day Simple Moving Average. However, the number of periods is optional and will depend on the characteristics of market-based instruments, as well as on individual preferences trader.
If the price movement of fluid and a hectic period of time, the Moving Average probably not the best choice for the analysis. MMM graph shows the share, which in late April, moved from 70 to 90 a few weeks. Prior to that, increasing the price gyrate above and below its moving average. After increasing the share continued its erratic behavior, not developing trend. Attempting to analyze this event, based on the moving average is likely to be futile.
A cursory glance at the schedule for AOL shows a picture different from MMM. During the same period of time, AOL has shown the ability to develop trend. There are 3 good trend that continued for several months. Once the action moves above or below the 70-day SMA, it usually continues to move in the same direction a certain amount of time. On the other hand MMM breaks above and below its 70-day SMA on many occasions and was prone to frequent quick turn. Longer Moving Average, probably would work better for the MMM, but it is clear that it has fewer features than the trend from AOL.
Installations for the moving average
As soon as the market-based instruments has shown enough evidence to identify a trend, the next task is to select the type and number of periods moving average. The number of periods used in the moving average will vary depending on the mobility market instrument, its propensity to trends and personal preferences. What mobile market instrument, it requires more smoothing, and hence longer Moving Average. Actions that do not show a strong tendency to trend, may also require longer moving averages. Checks and error - usually the best means to find a suitable length. Make a Moving Average is consistent with price data. If too many breakthroughs, the Moving Average extend to reduce its sensitivity. If Moving Average reacts slowly, the Moving Average shortens to increase its sensitivity. In addition, you can try to use Simple and Exponential Moving averages. Exponential Moving averages are usually best suited for short-term situations that require a more sensitive Moving Average. Simple Moving averages work well in the long-term situations that do not require great sensitivity.
Applications moving averages
There are many opportunities for the application of moving averages, but the three main:
"Identification / confirmation of the trend
"Identification / confirmation of support and resistance levels
"Trading systems
Identification / Confirmation of the trend
There are three ways to determine the direction of the trend using moving averages: direction, location, and crossing.
The first method used for determining the trend line moving average to determine the trend. If the Moving Average is directed upwards, the trend is considered to be ascending. If the Moving Average is directed downward, the trend of top-down view. The direction of the rolling average can be determined by simply looking at a plot of moving average, or applying to the moving average indicator. In any case, we would not want to react to every little change, but to see the general direction of motion and significant changes.
In the case of Disney, the trend was used to determine the 100-day Exponential Moving Average (EMA). We do not want to act on the basis of small changes in the moving average, but prefer to work on significant ups and downs. This is not a scientific study, but many significant turning points can be determined through visual observation (red circles). There were some good signals, but also quick-turn and late signals. In general, the results would depend on the points of entry and exit. Length of moving average influences the number of signals and their timeliness. Moving averages are indicators of delay. Therefore, the longer the rolling average, the more it will lag behind the price movement. For faster signals may use 50-day EMA.
The second way to determine a trend of prices. The situation regarding the price moving average could be used to determine the main trend. If the price is higher than the rolling average, the trend is considered to be ascending. If the price is below the moving average, considered top-down trend.
This example is fairly straightforward. Long-term trend for the Enron (ENE) is defined by the position of its shares on the 100-day SMA. When ENE was above its 100-day SMA, the trend was considered to be bovine. When the share is below the 100-day SMA, the trend was seen as bearish. Buy and sell signals are fed intersections above and below the moving average. He was given a short-term signal to the sale in August 1998. and buying the wrong signal in November 1999. Both of these signals occurred when the trend began to weaken Enron. Although most, this simple method to keep the investor in the direction of movement of bovine.
The third way to determine the trend based on the short moving average on the longer moving average. If a short Moving Average is above a long moving average, the trend is considered the bottom-up. If short Moving Average is lower than the long moving average - the trend is considered to be top-down.
For Xircom, in determining the trend of using the intersection of 30 - and 100-day moving averages. When the 30-day Moving Average moves above 100-day moving average, the trend believe bovine. When the 30-Day Moving Average falling below the 100-day moving average, the trend is viewed as bearish. The differential between them is shown below the price chart using a percentage-price oscillator (PPO) in plants (30100.1). When the differential of the positive, the trend is considered to be bottom-up - when the negative trend of top-down view. As with all of the following systems for the trend, the signals work well when the tool is developing a strong market trend, but are ineffective when the instrument is traded in the range. Also note that the signals have a tendency to lag, and served as the movement has already begun. Once again, following the trend indicators are best suited to determine and confirm the trend, rather than forecasting.
Levels of support and resistance
Another use of moving averages is to determine the levels of support and resistance. This is usually done using a moving average and is based on historical precedent. As with the definition of trend, level of support and resistance using a moving average works best on the market trend.
After the commercial breakthrough band Sun Microsystems successfully tested support moving average in late July and early August. Also, please note that breakthrough in June in the vicinity of 18 resistance turned to support. Therefore, the rolling average has acted as a confirmation of turning resistance in support. After this first test, 50-day rolling average has been 4 successful testing in support over the next few months. Breakthrough support for 50-day moving average would serve as a warning that the action can go to the trading range, or may begin a change of trend. That breakthrough came in April 2000. and 50-day SMA in the same month, has turned into resistance. When the event broke above the 50-day SMA in early June 2000. She returned to the level of support to the breakthrough in October 2000. In October of 2000. 50-day SMA has become a drag, and it lasted for many months.
Moving averages in graphic programs
Moving averages are available in almost all graphics programs. You can choose either Simple Moving Average, or exponential moving average cost. Typically, the first right box is used to determine the number of time periods. During the afternoon schedule, the value of 50 would be consistent with the 50-day moving average. On a weekly schedule, the same value corresponds to 50-week moving average. Moving averages are based on closing prices and the price schedule can be built a few moving averages.
Conclusion
Moving averages can be effective tools to identify and confirm the trend, determine the levels of support and resistance, and the development of trading systems. However, traders and investors must learn to identify market-based tools for analysis which can be used as a sliding average, and this analysis should be applied. Typically, the assessment can be made a visual study of the schedule, but sometimes it requires a more detailed approach. Indicator of the likely direction (ADX) is a tool that can help determine what tools to develop the market trend, and what does not.
Advantages of using moving averages must be compared with their disabilities. Moving averages are indicators, following the trend or delay indicators, which will always lag behind price movements. This is not necessarily a bad thing. Eventually, the trend - your best friend and trading in the direction of the trend. Moving averages can help to confirm that the trader has acted in accordance with the current trend. However, market-based instruments hold a lot of time, selling in the ranges that make Moving averages ineffective. If there is the trend, the sliding average will keep you in it, but later served signals. Do not expect that, using the sliding average, you'll buy at the bottom and sell at the top. As with most tools of technical analysis, Moving averages should not be used separately and in combination with other tools that will complement them. Using moving averages to confirm other indicators can significantly improve the effectiveness of technical analysis.
The two most popular types of moving averages - this is a simple Moving Average (SMA) and Exponential Moving Average (EMA).Simple Moving Average (SMA)
Simple Moving Average is formed by calculating the average price of market-based instruments for the specified number of periods. Although it is possible to form a sliding average on the basis of price discovery, the maximum and minimum, most moving averages use the closing price. For example: the importance of 5-day simple moving average is calculated by summing the closing prices over the past 5 days and dividing the total by 5.
Calculation is repeated for each price bar on the graph. Then, average values are connected and form a smooth curve line - moving average line. We continue our example: if the next closing price equal to 15, then this new period will be added, and the first day for which the value is 10, will be deleted. The new value of 5-day simple moving average would be calculated as follows:
Over the past 2 days, SMA moved from 12 to 13. As new days are added, the past few days will retire, and Moving Average will continue to move forward. In the example above, using closing prices for Eastman Kodak (EK), the tenth day is the first day, when possible to calculate the value of 10-day simple moving average. Since the computation continues, a new day is added, and the earliest date retracted. Significance of 10-day SMA for the eleventh day is calculated by summing the price from 2 to the 11th day and dividing the sum by 10. Then the process of calculating the moving average for the next day, where the 10-day SMA for the 12-day price is calculated by summing the 3 rd to 12 th day and dividing the sum by 10.
The schedule above is a piece that reflects the consistent data from a table. Simple Moving Average starting with the 10 th day and continues on.
This simple example reflects the fact that all moving averages are indicators of delay and will always be "lag" on prices. EK price went down, but the simple Moving Average, which is based on data from the previous 10 days remained higher prices. If the price increased, SMA probably would have been lower. Since Moving averages are indicators of delay, they belong to the category of indicators following the trend. When prices are in trend, Moving averages work well. However, when prices are not in trend, Moving averages can file false alarms.Exponential Moving Average (EMA)
To reduce the lag in simple moving averages, traders often use the Exponential Moving averages (also called "Moving averages weighted by the exponent). EMA reduces lag, giving more weight to recent prices on the earlier price. Given more weight to recent price depends on the period moving average. The shorter the period EMA, the more weight will be given to the most recent price. For example: 10-periodnaya Exponential Moving Average gives the most recent price of 18.18 weight%, while the 20-EMA periodnaya only 9.52%. As we shall see, EMA calculation more difficult than the calculation of SMA. It is important to remember that the Exponential Moving averages give greater weight to recent prices. Also, they will respond quickly to recent price changes than the simple moving average cost. Below is the formula for computing.
Computation of the exponential moving average
Exponential Moving averages can be defined in two ways - as an EMA-based EMA or as a percent based on the period. EMA is based on per cent per cent as its sole option, while the EMA is based on the period parameter, which represents the duration of EMA.
A formula for the exponential moving average:
EMA (current) = ((Price (current) - EMA (prev)) x multiplier) + EMA (prev)
For EMA, on the basis of per cent, "multiplier" is equal to the specified percentage of EMA.
For EMA, based on the period, "multiplier" is equal to 2 / (1 + N), where N - the specified number of periods.
For example, the multiplier from 10 EMA periods is calculated as follows:
This means that the EMA with 10 periods is equivalent to 18.18% EMA.* Note: Some graphics programs support only on the basis of EMA period.
Below is a table with the results of calculating the exponential moving average for Eastman Kodak. For odnoperiodnoy exponential moving average was used Simple Moving Average as an exponential average the previous period (yellow allocated value for the 10th period). Since the 11 th period EMA using the previous period. Below is a calculation for the 11-second period:1. (C - P) = (61.33 - 63.682) =- 2.352
2. (C - P) x K =- 2.352 x .181818 =- 0.4276
3. ((C - P) x K) + P =- 0.4276 + 63.682 = 63.254
* 10-periodnaya Simple Moving Average is used only for the first calculation. Then using the previous period EMA.
Please note that each previous closing price in a series of data used to calculate each value of EMA, which form the EMA line. While the impact of earlier data decreases over time, it never disappears entirely, regardless of the specified period EMA. The impact of earlier data is reduced for short EMA faster than that for long, but again, it never disappears completely.
Simple or ExponentialAt first glance it seems that the difference between the exponential moving average and the simple moving average is minimal. For this example, which uses only 20 trading days, the differences are minimal, but nevertheless, it is. Exponential Moving Average steadily closer to the actual price. On average, EMA to 3 / 8 point closer to the actual cost than the SMA.
On the 10 th day 20 th day, EMA was closer to the price than the SMA in 9 of 10 times. Once SMA was closer to 18-second period (highlighted in yellow) and it is not long lasting. The average absolute difference between the exponential moving average and the current price of 1, a simple Moving Average had an average absolute difference - 1.33. This means that, on average, Exponential Moving Average was at 1 point above or below the current price, but just rolling average was 1.33 points higher or lower than current prices.
When EK stopped falling and began to haggle in the commercial field, SMA continued to decline. During this period SMA was closer to the actual price than EMA. EMA start to deviate from the actual price, and was farther from it. This occurred because the actual cost began to change direction. Due to its delay SMA continued to decline, and December 13, even addressed the actual price.Comparison of 50-day EMA and 50-day SMA for Compaq also shows that the EMA follows the trend quicker than the SMA. The blue arrows mark the point when the action started a strong trend. Attaches more weight to recent prices, EMA reacted quicker than the SMA and remained closer to the actual price. The gray circle shows when the trend began to slow down and trade has moved into range. When there is a shift from the trend to trade in a range, SMA was closer to the price. As the band continued to trade in the second half of 1999., Moving averages, both agreed. At the end of 1999. Compaq began to build upward trend and the EMA to respond quickly to recent price changes, and remained close to the price.
Which is better?
Which Moving Average to use depends on your trading style and your preferences. Simple Moving Average is obviously lagging behind, but the Exponential Moving Average can be prone to more rapid breakthroughs. Some traders prefer to use Exponential Moving averages for shorter periods of time to display a more rapid change. Some investors prefer for long periods of Simple Moving averages to determine the long-term changes in trends. In addition, much will depend on the particular market instrument. 50-day SMA is better able to work in determining the levels of support for the Nasdaq, but the 100-day EMA may be better for the Dow Transports. Type of moving average and the time period will greatly depend on the particular market instrument and how it reacted in the past.
Some may seem that the higher sensitivity and earlier alerts have to be more profitable. This is not always accurate and has a big dilemma for the technical analyst: the choice between the sensitivity and reliability. The more susceptible indicator, the more signals it will bring. These signals may prove timely, but with increased sensitivity increases the number of false alarms. Less sensitive indicator gives smaller signals. However, less sensitivity leads to fewer but more reliable signals. Sometimes these signals can be delayed.
For moving averages, this raises the same dilemma. Shorter Moving averages are more sensitive and to cast more signals. EMA, which is generally more sensitive than the SMA, probably also will bring more signals. However, also will increase the number of false signals and rapid turn. Longer Moving averages will move slower and to cast fewer signals. These signals are likely to be more reliable, but they may also be delayed. Every investor or trader should experiment with different types and periods moving averages to determine the relationship between sensitivity and reliability of the signal.
The indicator follows the trend
Moving averages smooth consistency of price data and facilitate the definition of trend. As for the formation of moving averages of past price data are used, they believe, or delay for the trend following indicators. Moving averages will not prevent a change of trend, but rather to follow the current trend. Therefore, they are best suited to determine the trend and the goals associated with the current trend rather than to predict.
When to use
Since Moving averages are for the trend, they work best when the tool is in the market trend and are ineffective when the market moves in a shopping tool range. With this in mind, investors and traders should first identify the market-based instruments, which show signs of the trend, and then try to analyze them with the use of moving averages. This process should not be a scientific examination. Usually, a simple visual assessment of the price schedule will help determine whether market-based instruments has shown signs of the trend.
In its most simple form, the price of market-based instruments can only do one of three things: develop a trend upward, downward trend to develop and haggle in the price range. Ascending trend of development, when market-based instruments creates a series of higher highs and higher minima. Top-down trend is developing where the market-based instruments creates a series of lower minimums and lower highs. Trade in the price range may occur if market-based instruments can not ascending or descending trend. If market-based instruments traded in the price range, rising trend begins when breached the upper limit of the range, and top-down trend started when the broken lower limit.
In the case of Ford, it is clear that action can be found in the trend, and in the commercial range. The red circles indicate the stage of trade in a range that cyclical trend. Sometimes difficult to determine when the trend ends and begins trading in the range, or when trading in the range of stops and starts the development trend. Basic rules for the trend and trade in the ranges set forth above may be applied to Ford. Pay attention to the times of trading bands, breakthroughs (such as up and down) and periods of trends. Moving Average worked well in the trend, but it does not matter when trading in the range. Also note, as the Moving Average is late for the trend: it is always a price at the time of a rising trend and higher prices in the downstream. For this example use 50-day Simple Moving Average. However, the number of periods is optional and will depend on the characteristics of market-based instruments, as well as on individual preferences trader.
If the price movement of fluid and a hectic period of time, the Moving Average probably not the best choice for the analysis. MMM graph shows the share, which in late April, moved from 70 to 90 a few weeks. Prior to that, increasing the price gyrate above and below its moving average. After increasing the share continued its erratic behavior, not developing trend. Attempting to analyze this event, based on the moving average is likely to be futile.
A cursory glance at the schedule for AOL shows a picture different from MMM. During the same period of time, AOL has shown the ability to develop trend. There are 3 good trend that continued for several months. Once the action moves above or below the 70-day SMA, it usually continues to move in the same direction a certain amount of time. On the other hand MMM breaks above and below its 70-day SMA on many occasions and was prone to frequent quick turn. Longer Moving Average, probably would work better for the MMM, but it is clear that it has fewer features than the trend from AOL.Installations for the moving average
As soon as the market-based instruments has shown enough evidence to identify a trend, the next task is to select the type and number of periods moving average. The number of periods used in the moving average will vary depending on the mobility market instrument, its propensity to trends and personal preferences. What mobile market instrument, it requires more smoothing, and hence longer Moving Average. Actions that do not show a strong tendency to trend, may also require longer moving averages. Checks and error - usually the best means to find a suitable length. Make a Moving Average is consistent with price data. If too many breakthroughs, the Moving Average extend to reduce its sensitivity. If Moving Average reacts slowly, the Moving Average shortens to increase its sensitivity. In addition, you can try to use Simple and Exponential Moving averages. Exponential Moving averages are usually best suited for short-term situations that require a more sensitive Moving Average. Simple Moving averages work well in the long-term situations that do not require great sensitivity.
Applications moving averages
There are many opportunities for the application of moving averages, but the three main:
"Identification / confirmation of the trend
"Identification / confirmation of support and resistance levels
"Trading systems
Identification / Confirmation of the trend
There are three ways to determine the direction of the trend using moving averages: direction, location, and crossing.
The first method used for determining the trend line moving average to determine the trend. If the Moving Average is directed upwards, the trend is considered to be ascending. If the Moving Average is directed downward, the trend of top-down view. The direction of the rolling average can be determined by simply looking at a plot of moving average, or applying to the moving average indicator. In any case, we would not want to react to every little change, but to see the general direction of motion and significant changes.
In the case of Disney, the trend was used to determine the 100-day Exponential Moving Average (EMA). We do not want to act on the basis of small changes in the moving average, but prefer to work on significant ups and downs. This is not a scientific study, but many significant turning points can be determined through visual observation (red circles). There were some good signals, but also quick-turn and late signals. In general, the results would depend on the points of entry and exit. Length of moving average influences the number of signals and their timeliness. Moving averages are indicators of delay. Therefore, the longer the rolling average, the more it will lag behind the price movement. For faster signals may use 50-day EMA.
The second way to determine a trend of prices. The situation regarding the price moving average could be used to determine the main trend. If the price is higher than the rolling average, the trend is considered to be ascending. If the price is below the moving average, considered top-down trend.This example is fairly straightforward. Long-term trend for the Enron (ENE) is defined by the position of its shares on the 100-day SMA. When ENE was above its 100-day SMA, the trend was considered to be bovine. When the share is below the 100-day SMA, the trend was seen as bearish. Buy and sell signals are fed intersections above and below the moving average. He was given a short-term signal to the sale in August 1998. and buying the wrong signal in November 1999. Both of these signals occurred when the trend began to weaken Enron. Although most, this simple method to keep the investor in the direction of movement of bovine.
The third way to determine the trend based on the short moving average on the longer moving average. If a short Moving Average is above a long moving average, the trend is considered the bottom-up. If short Moving Average is lower than the long moving average - the trend is considered to be top-down.
For Xircom, in determining the trend of using the intersection of 30 - and 100-day moving averages. When the 30-day Moving Average moves above 100-day moving average, the trend believe bovine. When the 30-Day Moving Average falling below the 100-day moving average, the trend is viewed as bearish. The differential between them is shown below the price chart using a percentage-price oscillator (PPO) in plants (30100.1). When the differential of the positive, the trend is considered to be bottom-up - when the negative trend of top-down view. As with all of the following systems for the trend, the signals work well when the tool is developing a strong market trend, but are ineffective when the instrument is traded in the range. Also note that the signals have a tendency to lag, and served as the movement has already begun. Once again, following the trend indicators are best suited to determine and confirm the trend, rather than forecasting.Levels of support and resistance
Another use of moving averages is to determine the levels of support and resistance. This is usually done using a moving average and is based on historical precedent. As with the definition of trend, level of support and resistance using a moving average works best on the market trend.
After the commercial breakthrough band Sun Microsystems successfully tested support moving average in late July and early August. Also, please note that breakthrough in June in the vicinity of 18 resistance turned to support. Therefore, the rolling average has acted as a confirmation of turning resistance in support. After this first test, 50-day rolling average has been 4 successful testing in support over the next few months. Breakthrough support for 50-day moving average would serve as a warning that the action can go to the trading range, or may begin a change of trend. That breakthrough came in April 2000. and 50-day SMA in the same month, has turned into resistance. When the event broke above the 50-day SMA in early June 2000. She returned to the level of support to the breakthrough in October 2000. In October of 2000. 50-day SMA has become a drag, and it lasted for many months.
Moving averages in graphic programs
Moving averages are available in almost all graphics programs. You can choose either Simple Moving Average, or exponential moving average cost. Typically, the first right box is used to determine the number of time periods. During the afternoon schedule, the value of 50 would be consistent with the 50-day moving average. On a weekly schedule, the same value corresponds to 50-week moving average. Moving averages are based on closing prices and the price schedule can be built a few moving averages.
Conclusion
Moving averages can be effective tools to identify and confirm the trend, determine the levels of support and resistance, and the development of trading systems. However, traders and investors must learn to identify market-based tools for analysis which can be used as a sliding average, and this analysis should be applied. Typically, the assessment can be made a visual study of the schedule, but sometimes it requires a more detailed approach. Indicator of the likely direction (ADX) is a tool that can help determine what tools to develop the market trend, and what does not.
Advantages of using moving averages must be compared with their disabilities. Moving averages are indicators, following the trend or delay indicators, which will always lag behind price movements. This is not necessarily a bad thing. Eventually, the trend - your best friend and trading in the direction of the trend. Moving averages can help to confirm that the trader has acted in accordance with the current trend. However, market-based instruments hold a lot of time, selling in the ranges that make Moving averages ineffective. If there is the trend, the sliding average will keep you in it, but later served signals. Do not expect that, using the sliding average, you'll buy at the bottom and sell at the top. As with most tools of technical analysis, Moving averages should not be used separately and in combination with other tools that will complement them. Using moving averages to confirm other indicators can significantly improve the effectiveness of technical analysis.
based on Stockcharts.com
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