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Exclusive Market Analysis, Alerts and Commentary from the DaytradeTeam trading staff
Friday, April 13, 2007
Moving Averages---What Are they?
k I'm One of the most versatile and widely used of all technical indicators is the moving average. The way it's constructed and the fact it's so easily quantified and tested lead way to it being the basis for many mechanical trend-following systems being used today.
Unlike chart analysis, which is subjective, difficult to test, and subsequently hard to computerize, the moving average can be easily programmed into the computer resulting in specific buy and sell signals. Two Stock Traders or Option traders using technical analysis may disagree as to whether a given price pattern is a triangle or a wedge, or if the volume pattern is on the the bull or bear side of the market, but moving average trend signals are always precise and not open for debate.
Let's define what a moving average is. As implied by its name, it is an average of a specific body o f data. As an example, our trader wants a 10 day average of the closing prices, so prices for the last 10 days are added together and the total divided by 10. Moving means the information changes with each subsequent entry. Since we are working with a 10 day average, each new day's closing price will be added, the 11th day back will be subtracted, and the new total is divided by 10.
There are three types of moving averages - the simple, the linearly weighted, and the exponentially smoothed. The purpose of all three is to track and signal trend movement. Below is a rough graph showing the use of a 10 day moving average.
Unlike chart analysis, which is subjective, difficult to test, and subsequently hard to computerize, the moving average can be easily programmed into the computer resulting in specific buy and sell signals. Two Stock Traders or Option traders using technical analysis may disagree as to whether a given price pattern is a triangle or a wedge, or if the volume pattern is on the the bull or bear side of the market, but moving average trend signals are always precise and not open for debate.
Let's define what a moving average is. As implied by its name, it is an average of a specific body o f data. As an example, our trader wants a 10 day average of the closing prices, so prices for the last 10 days are added together and the total divided by 10. Moving means the information changes with each subsequent entry. Since we are working with a 10 day average, each new day's closing price will be added, the 11th day back will be subtracted, and the new total is divided by 10.
There are three types of moving averages - the simple, the linearly weighted, and the exponentially smoothed. The purpose of all three is to track and signal trend movement. Below is a rough graph showing the use of a 10 day moving average.
Become involved in the excitement of Day Trading by joining our professionals in our Live Trading Room. Watch as experts use the moving average and other technical tools to analyze your trades.
Happy Trading,
Nick Fenton
VP of Operations, DaytradeTeam
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