: moving average.Where to find
or any other charting program. Default value: 50 and 200 days.
Frequency: weekly for longer-term signals, daily for short-term signals.Usage
: in trend analysis.It's simple
: the moving average, which I call "best friend", will help you stay on trend and stay out of trouble, which, in fact, is required from a good friend.What does the moving average show?
A moving average helps you understand if a trend is ending or starting.Step by Step: How to Interpret a Five Minute Moving Average:
in your web browser (or open any charting program).
On the right side of the screen, enter $SPX, the code for the S&P 500. Note: You can also select $INDU (Dow Jones) or $COMPQ (composite NASDAQ) if you like.
On the chart that appears, you will see the 50- and 200-day simple moving averages along with the $SPX market index.
On your computer screen, the blue line will be the 50-day moving average and the red line will be the 200-day moving average.
The constructed graph will have the form shown in Fig. one.What to pay attention toBuy
: If the index or stock price line goes above the 50- or 200-day moving average, then this could be a buy signal.Sell
: If the index line or stock price goes below the 50 or 200 day moving average, it could be a sell signal.Note
: This is not a direct guide to action, but only recommendations. Always check what other indicators are saying before buying or selling.Tip
: You already saw this chart at the beginning of part one, but now a moving average has been added to it. Please note: the moving average on the chart helps to understand what the trend is now. In the chart below, the S&P 500 index is in an extremely dangerous zone. Will it drop below the 50-day moving average?Background
It is believed that Richard Donci-an first developed the moving average while working for various investment firms. It is said that Donchian became interested in stock trading after reading a book by the famous trader Jesse Livermore. After suffering heavy losses early in his career during the 1929 crisis, Donchian developed a trading system based on technical indicators, called "trend following", which used a moving average of commodity prices.
Trend-following formed the basis of the turtle trading system, which became widespread thanks to the "wizards" of trading William Eckhardt and Richard Dennis.
Another pioneer in the use of the moving average was J. M. Hurst. He developed the moving average system and described it in his acclaimed book Magic Market Timing Returns in the Stock Markets.How the moving average works
Many traders and investors have stated that if they were forced to choose one indicator, they would choose the moving average. Even those investors who do not look at indicators at all pay attention to it. Why? Because it's a powerful yet easy to use indicator and it's easy to "read" it on a chart.
In short, a moving average shows how the price of a stock has changed over a certain period of time, such as 20, 50, 100, or 200 days. By superimposing a moving average on a chart of a stock price or a market index, you get a pretty good idea of where the market is heading. Traders who use trend-following strategies are very fond of moving averages. Also, with the help of a moving average on the chart, it is much easier to notice a trend change. For example, if the market falls below one of the moving averages, this may mean that the current trend is ending.
I think one of the good reasons to use a moving average is that it helps take the emotion out of the trading process. For example, if you make a habit of buying when the market rises above the 50-day moving average (and stays above it) and selling when the market falls again, you'll be surprised at how much you can make. Sometimes it's hard to believe that the system can bring profit so easily. However, many traders try to change the initial settings and use different time frames.Decisions, decisions
When you first look at moving averages, you will need to choose from seven types. Without getting into the math, most people choose the simple moving average because it's...simple.
For example, a 20-day moving average is calculated as follows: the sum of the closing prices for the last 20 days is determined, which is then divided by 20. When the 21st day is added, the first day is discarded. In other words, old days are discarded as new day information becomes available, i.e. this indicator is constantly changing, which is why it is called the moving average. As a result of the daily repetition of such a procedure, a smoothed line is obtained, which can be displayed on the chart.
Another popular type of moving average is the exponential moving average. It is calculated in a similar way, but the last time intervals have slightly more weight. If you can choose between simple and exponential moving averages, it might make sense to choose exponential. Why? First, it gives more accurate results. Secondly, a simple moving average is slightly slower to respond to changes than an exponential one. (Note: if you want to learn more about exponential moving averages, see Chapter 12 for a list of useful resources.)
Next, you need to choose which moving average to display on the chart. If you are a short term trader, you are better off using a 14 or 20 day moving average. For the rest, the direction of the market perfectly shows the 50-, 100- and 200-day moving average.Remember
: the shorter the time interval, the more signals occur. Think of the 20-day moving average as a fast and agile cheetah, and the 200-day moving average as a slow three-toed sloth.The almighty 200-day moving average
When the market crosses the 200-day moving average in any direction, it is considered an extremely important signal. So many traders and investors follow the 200-day moving average that such a signal simply cannot go unnoticed. Also, not only the 200-day moving average, but other types of moving averages act as support (sort of like a floor) for the market on its way down. It is amazing how the market or specific stocks fall to a certain level of support and stop there without falling lower. In order to bring the market below the moving average, a very significant volume of orders to sell is required.
And on the way up, another moving average acts as a resistance level (acting as a ceiling). In this case, a very serious volume of buy orders is required for the market to rise above the 200-day moving average.Everyone can make a mistake
As powerful as the moving average is, it should not be considered a silver bullet. Critics point out that at times the moving average reacts rather slowly to changes in the market situation. Remember: it is called a lagging indicator because it is related to the stock price and may give signals with some delay.
For example, critics say that when the market finally drops below the 200-day moving average, you will lose about 20% of your capital. By this time, it will be obvious to everyone that the market is going down. Moving average advocates argue that this indicator is not originally designed to accurately predict when the market is bottoming or topping, it simply helps to follow the trend.
There is one more feature of the moving average that you should be aware of: like any other indicator, it is not universal and may not work correctly under certain market conditions. The moving average works great in a trending market. But in a non-trending and often changing direction market (also called a sideways market), using a moving average is inefficient. When the market is not moving anywhere, it is better to focus on its other indicators.Step by step: choose a 100-day exponential moving average
Since we've already talked a lot about exponential moving averages, this section will briefly show how you can change the default chart settings on StockCharts.com
. (If you are an advanced user or use your own brokerage software, you can skip this description.)
We will be plotting a 100-day exponential moving average.
Go to www.stockcharts.com
and enter $SPX.
Go to the Chart Attributes section below the chart.
Pay attention to the default values for the time period - Daily (Daily) and the chart type - Candlesticks (Japanese candles). You can change them at any time.
In the Overlays section, select None.
A drop-down menu will appear - it is in it that other market indicators are hidden. (If you're using a site other than StockCharts.com
, the indicators will still be in the dropdown menu.)
Choose an exponential moving average (EMA). The 20-day moving average will appear - it is set by default. Click Update.Important
: After making any changes to the settings on StockCharts.com
, you must always click the Update button.
Scroll back to the graph. It added a third line - a 20-day exponential moving average. She will be green.
Congratulations, you made it! Now you know how to change the settings and parameters of any other chart.