Discover the Dynamics of Using Moving Averages
The “moving average” is a technical indicator which has stood the test of time. Nearly 25 years ago, Robert Prechter described this indicator in his famous essay, “What a Trader Really Needs to be Successful.” What he said then remains true today:
“…a simple 10-day moving average of the daily advance-decline net, probably the first indicator a stock market technician learns, can be used as a trading tool, if objectively defined rules are created for its use.”
Indeed, “objectively defined rules” are vital to the successful use of moving averages. And as you might imagine, advanced rules and guidelines work to the benefit of more advanced technicians.
What is a moving average? As EWI’s Jeffrey Kennedy puts it, “A moving average is simply the average value of data over a specified time period, and it is used to figure out whether the price of a stock or commodity is trending up or down.”
Jeffrey also says, “One way to think of a moving average is that it’s an automated trend line.”
A 15-year veteran of technical analysis, Jeffrey wrote “How You Can Find High-Probability Trading Opportunities Using Moving Averages.”
[Descriptions of the following charts are summaries from that eBook]:
Let’s begin with the most commonly-used moving averages among market technicians: the 50- and 200-day simple moving averages. These two trend lines often serve as areas of resistance or support.
For example, the chart below shows the circled areas where the 200-period SMA provided resistance in an April-to-May upward move in the DJIA (top circle on the heavy black line), and the 50-period SMA provided support (lower circle on the blue line).
Let’s look at another widely used simple moving average which works equally well in commodities, currencies, and stocks: the 13-period SMA.
In the sugar chart below, prices crossed the line (marked by the short, red vertical line), and that cross led to a substantial rally. This chart also shows a whipsaw in the market, which is circled.
Jeffrey’s 33-page eBook also reveals a useful tool to help you avoid “whipsaws.”
You can read the first two chapters for FREE for a limited time, once you become a Club EWI member.
The first two chapters reveal:
- The Dual Moving Average Cross-Over System
- Moving Average Price Channel System
- Combining the Crossover and Price Channel Techniques
Jeffrey’s insights are all about making you a better trader.
This article was syndicated by Elliott Wave International and was originally published under the headline Discover the Dynamics of Using Moving Averages. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
