Technical Analysis - Moving Averages

Discussion in 'Technical Analysis' started by MasterTrader, Mar 5, 2005.

  1. MasterTrader

    MasterTrader New Member

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    Technical Analysis - Moving Averages​


    This is my first post here so I thought I would discuss moving averages.

    Although moving averages are an imprecise technical tool, they are effective in their ability to help define the environment that you are trading in. In their most common form, moving averages are just a simple average of a market's closing prices for the last x number of periods. Those periods may be days, weeks, months or minutes. Their simplicity allows for considerable flexibility in their use and construction.

    To calculate a 9 day moving average you merely add up the closing prices for the last 9 days and divide by the number of days. In this case the divisor would be 9. At the close of business on the 10th day, you would recalculate the average by dropping of the first day and adding the tenth to your calculation.

    The moving average will always lag behind the market. As such, it makes for an excellent trend indicator. The market is in an uptrend when its last price is above the moving average and declining when the last price is below the moving average. You will lose some sensitivity if you use two moving average calculations such as a 9 & 18 day combination. Here, the uptrend is when the shorter, more sensitive moving average crosses over the longer average. The 9 & 18 day combination is the most common set of parameters for moving average analysis. The numbers are based on the assumption of 20 trading days in a month combined with the desire by traders to get a little advance warning ahead of everyone else. Hence, the 18 day value. The 9 day value is a harmonic of the larger 18 day value.

    You can use these trend indications as a trading signal and go long the market when an uptrend is indicated and reverse when a downtrend materializes as the averages again cross each other. With this methodology you are always in the market. Although, this system does an excellent job of catching developing trends, it can devastate your account as the market consolidates or reverses its trend. You could find yourself trading rapidly for numerous small losses and giving back your trend profits through commissions and slippage. Another common usage is to use moving averages as a trend filter for your trades. Thus, if the moving average(s) indicate an uptrend is in progress you would take only the buy signals generated by your system or methodology. The reverse is true if the moving averages indicate a downtrend is taking place. Another application is trend confirmation for when the averages approach but do not cross each other.

    There are also several different ways of calculating a moving average. The simple moving average discussed above weights all past data equally. There is a school of thought that believes that the more distant the price action the less relevant it is to the current market situation. For those situations we find a use for exponential and weighted moving averages.

    Any questions or comments please discuss here!
     
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  2. amgandhi

    amgandhi New Member

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    Do You Use Any Software To Calculate The Moving Averages Or Use Excel Sheet For The Same.
     
  3. sara

    sara Member

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    How moving average crossover could be useful, how to calculate exponential , weighted, time series, triangular, variable, volume adjust , moving average and how are they useful to a trader.
     
  4. Traderji

    Traderji Super Moderator

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    It is always best to use a technical analysis package for calculating moving averages.
     
  5. garun1979

    garun1979 Member

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    Hi,

    I have recently started tech analysis and have been using 6 EMA,20 EMA ,50 EMA ,200 EMA and RSI.

    I have been able to use these successfully for Spanco sys which has bounced back( increased 16%) with high volumes yesterday after hitting its 50 EMA.I booked my profts yesterday.

    My query is whether one should have wait because the stock has bounced from its %) EMA with strong volumes and is it a sign of an uptrend?

    Thanks

     
  6. MasterTrader

    MasterTrader New Member

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    This is a sign of a strong stock.

    Also if the 50 DMA is sloping up it sloping up it confirms an uptrend.
     

  7. MasterTrader

    MasterTrader New Member

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    Re: Technical Analysis - Interpretation Of Moving Averages

    Interpretation Of Moving Averages

    The moving average is a smoothed trend and as such often acts as an area of support or resistance. Retracements of stock prices often reverse when they reach the moving average level, i.e. in a rising trend a falling stock price often finds support and in a falling market rising stock prices often find resistance when they reach the level of the moving average.

    The penetration or cross over of a moving average (and therefore of a smoothed line of support or resistance) by the stock price is frequently the signal of a major trend reversal.

    If the moving average has flattened out or has already reversed direction then its violation increases the likelihood of a reversal of the recent trend.

    The longer the time span used to calculate the moving average the greater the significance of its violation by price, i.e. A forty week moving average violation by price is of more significance than that of a four week moving average which is of more significance than that of a four day moving average.

    Choosing An Appropriate Time Span For Your Moving Average

    Different markets, different market cycles and different investor goals will determine the most appropriate time period for which to calculate the moving average. Experience has shown most helpful studies include:

    Major primary trend monitored by a 40 week (200 day) moving average.
    Intermediate term trend by a 40 day moving average.
    Short term trend by a 20 day moving average.

    Multiple Moving Averages

    By using two or even three moving averages the fluctuations of the data under study are smoothed twice or thrice thereby minimizing misleading whipsaws yet indicating trend reversal shortly after having taken place.

    The trend reversal signal is given when the short term moving average crosses over the longer term moving average, both averages having already at least flattened out or better yet reversed direction.

    For a primary trend reversal in stocks a 5 and 40 week moving average cross over has been shown to be good. Again both averages must have changed direction for the cross over to be a valid signal. This signal then confirms the price trend reversal and occurs after the actual peak or trough of prices of the data under study.
     
  8. roneeth

    roneeth Member

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    Hello friends!

    I came across this site i guess it will be useful.
    http://www.finpipe.com/equity/charts.htm

    Happy Investing!!!!!!!!!
    roneeth
     
  9. Ksera

    Ksera New Member

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  10. rah75

    rah75 New Member

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    Re Moving Averages:
    Before I buy a stock I must have a positive cross-over of a simple 13 and a 40 week moving average on a weekly chart.
    On a daily chart I use a 19 and a 32 exponential m.a. plus a 200 exponential m.a.
    I also require a breakout on a point and figure chart, or at least a very good looking P&F set-up if it has not yet broken out.
    I think that the most important criteria is the weekly m.a. requirement, as if the trend is not up I would never take the trade.
    I am a position trader and not a day trader.
    I play the Canadian (Toronto) market, but I am very interested in learning about the Indian stock market.
     
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