An Intro to Moving Averages: Popular Technical Indicators

by Wayne A. Thorp, CFA

An Intro To Moving Averages: Popular Technical Indicators Splash image

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.

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.

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Wayne A. Thorp, CFA is a vice president and senior financial analyst at AAII and editor of Computerized Investing. Follow him on Twitter at @AAII_CI.


Discussion

Anonymous from Virginia posted over 2 years ago:

Will there ever be moving averages on Stock Investor Pro?


Wayne from Illinois posted over 2 years ago:

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


Munro from California posted over 2 years ago:

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.


Ray from Texas posted over 2 years ago:

Historically has 200 day moving averages been substantially profitable when used to enter or exit the market entirely?


Douglas from California posted over 2 years ago:

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.


Donald Dony from posted 2 days ago:

In the comment "that all technical indicators rely on events that have already occurred—namely historical prices and volume." we must remember that all forward fundamental calculations are, at best, an educated guess. The most reliable fundamental analysis relies on historical data.


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