Moving Average
Moving Averages are considered to be one of the oldest and most useful technical indicators available. It is basically a representation of a financial instruments price over a given time.
One of the great things about the Moving Average is that it is entirely objective - there is no arguing which direction it is going and is not open to debate in the same way as some other technical indicators. Another attractive feature of the Moving Average is its simplicity to use and interpret it.
In its basic form, there is the Simple Moving Average (SMA). An example could be a 20 day SMA - SMA(20). This would be calculated by taking the sum of the prices of the instrument for the last 20 days and dividing them by 20.
A slightly more complicated (and perhaps more useful) form is the Exponential Moving Average (EMA). This is calculated by applying a percentage of the most recent price to its preceding price - which results in a weighting of the Moving Average to the current price as well as a greater impact on it.
There are many ways to impliment the Moving Average into your trading style or trading system - some examples are:
- Using a 200 day Moving Average as an indicator of the markets current trend.
- Using a 40 day Moving Average as an exit signal - If the price falls below this Moving Average then it is time to sell.
- Using a Moving Average as a filter - not purchasing a stock until its price is 10% greater than its 20 day Moving Average
- Using a pair of Moving Averages for a cross-over system - When the 10 day Moving Average crosses to be above the 30 day Moving Average, then buy the stock - When it crosses below, then sell.
You will find that there are many different uses fot the Moving Average and that many different investors use them for many different reasons - And if you think it suitable to your trading style, that it is an indicater which warrents further research.
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