An Intro to Moving Averages: Popular Technical Indicators
by Wayne A. Thorp, CFA
Over the last few articles, we have covered many of the basics of technical analysis, mainly chart types and pattern recognition. Having laid the foundation, it is time to move on to a more involved discussion and delve into the core of technical analysis—indicators—and how they are used in the analysis process and in the development of systematic trading strategies. To get things started, we will begin with one of the more basic, yet quite popular, indicators—moving averages.
In this article
- Moving averages
- price cycles
- price inputs
- simple moving average
- weighted averages
- Exponential averages
- Percentage = 2 ÷ (Time Period + 1)
- conclusion
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Moving averages
Moving averages are among the oldest and most widely used technical analysis tools. Due to the relative ease with which they are calculated, moving averages are the preferred tools of newcomers to technical analysis. They have also found favor among some fundamental analysts who make decisions on fundamental factors such as earnings and sales but use moving averages to time buy and sell decisions. With the wide availability of computers and their increased use in financial analysis, you can now create moving averages covering several decades worth of data in a matter of seconds.
A moving average is defined as the average price of a security over a set time period. In essence, moving averages are “bending trendlines.” Remember that a trendline is typically drawn between two or more peaks highs or troughs lows in the price movement of a security. Over time, both trendlines and moving averages can be used to establish points of resistance or support for the price. However, moving averages overcome some of the criticisms of trendlines—mainly that they are subjective in their construction. While moving averages can be customized to meet individual needs, they are still based on cold, hard mathematical calculations. In addition, whereas straight-line trendlines are static in nature, moving averages portray dynamic levels of support or resistance as prices move.
Moving averages, by their very nature, smooth data. In other words, they tend to eliminate—or at least lesson the impact of—“blips” or outliers in price data. Moving averages show trends in price, but their nature is to represent the trend in a smoothed fashion.
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Discussion
Will there ever be moving averages on Stock Investor Pro?
posted about 1 year ago by Anonymous from Virginia
Stock Investor is a fundamental stock screening program. As such, it does not have technical indicators such as moving averages. Furthermore, the program only has monthly pricing, so moving averages would not be as dynamic as they would be with daily or weekly prices. Wayne A. Thorp, CFA, editor, Computerized Investing
posted about 1 year ago by Wayne from Illinois
what effect should volume have on one's analysis of move? How can one interject vome ionto the analysis? When the figure is available, I looked at total up-volume vs total down-volme over a particular period of time. But Scottrade no lonfger makes that nmber avalable.
posted about 1 year ago by Munro from California
Historically has 200 day moving averages been substantially profitable when used to enter or exit the market entirely?
posted about 1 year ago by Ray from Texas
J.S. Payne had an interesting article in the October 1989 "Technical Analysis of Stocks and Commodities." The moving average calculation he advocated in that article is one in which the most recent and last data points are weighted once, the next two data points (next to most recent and next to last) are double weighted, and so on until you reach the mid-point of the data points. All of these weighted data point values are then, of course, summed together and then divided by the sum of the weightings themselves. The results seemed to provide cleaner trend lines at virtually all moving average lengths -- with greater clarity being achieved at longer lengths. Have you or any of the members played with this? Does Meta Stock provide for this calculation? Take care.
posted about 1 year ago by Douglas from California
