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An Introduction to Moving Averages

An Introduction to Moving Averages
June 27
17:22 2011

Technical analysis of market charts is just a set of tools used to analyze what a series of prices indicate. It can be philosophically justified because efficient markets should reflect all the known information about themselves in their prices. But their communication usually requires a little translation, and that’s where the tools of technical analysis come into play. Moving averages are one of the most powerful and commonly used technical analysis tools.

The moving averages that are part of the technical analysis toolkit are exactly the same, mathematically speaking, as the moving averages you may have worked with in a high school or college statistics class. Basically, they’re calculated by taking a set number of previous data points (e.g. the last 10 trading days’ closing prices) and finding the mean value (i.e. the average). Then, for the next moving average point, you move forward a day and take the next set of 10 trading days’ closing prices. And so forth until you have a full series of averages connected in a line, each calculated from the previous 10 days’ average.

The example of the 10-day moving average was somewhat arbitrary. You can calculate moving averages from any number of time periods you choose, and experiment with several timeframes to backtest your own trading programs to find the ones that work best for you. There are certain guidelines for what you may be trying to achieve. Nimble, short-term trading programs will be best served by a short time period for their moving averages. The 10-day moving average is common, but day traders could even use 10-hour or 10-minute, if it serves their purpose. There are also medium-term and long-term moving averages, like the commonly followed 50-day and 200-day moving averages.

Even if you’re not using moving averages to trigger your own trading decisions, but rather just to keep track of significant moments in the market that other traders might be watching, you can watch the 50-day and 200-day moving averages.

You can also get more complex in how you calculate the moving averages themselves. Smoothing factors can be applied, or exponential moving averages can be used instead of simple moving averages. Again, it is simply a matter of finding the tool that fits best with your own trading program.


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However they’re calculated and with whatever timeframe, moving averages are an inherently backward-looking measurement. But they do quickly and clearly indicate how a market has been trending: upwards, downwards, or sideways. Importantly, they can also be the basic measurement from which other technical analysis techniques can be applied. For instance, when one moving average crosses over another moving average, it’s a significant trigger to some technical traders. Other more complex technical tools, like Bollinger bands and McClellan oscillators, depend on first creating moving averages to be used, so they are a very basic, very important tool in any technical trader’s toolkit.

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