Many traders and investors use technical indicators to support
their analysis. One of the most popular and reliable also
happens to be an indicator that has been around for years
and years — moving averages.
A moving average is simply the average value of data over
a specific time period. Analysts use it to figure out whether
the price of a stock or a commodity is trending up or down.
It effectively “smooths out” the daily fluctuations
to provide a more objective way to view a market.
Although simple to construct, moving averages are dynamic
tools, because you can choose which data points and time
periods to use to build them. For instance, you can choose
to use the open, high, low, close or midpoint of a trading
range and then study that moving average over a time period,
from tick data to monthly price data or longer.
Moving Averages can help you identify the trend in a market,
which is important since we all know that the trend is
your friend. Yet certain moving averages can serve as
support or resistance, and also alert you to trading opportunities.
This excerpt from EWI Senior Analyst Jeffrey Kennedy’s free
eBook, How You Can Find High-Probability Trading Opportunities
Using Moving Averages, shows how a popular moving average
setting identified trading opportunities in the stock of
Johnson & Johnson. Download
the full 10-page eBook here.
A popular moving average setting that many people work
with is the 13- and the 26-period moving averages in tandem.
The figure below shows a crossover system, using a 13-week
and a 26-week simple moving average of the close on a 2004
stock chart of Johnson & Johnson. Obviously, the number
26 is two times 13.
During this four-year period, the range in this stock was
a little over $20.00, which is not much price appreciation.
This dual moving average system worked well in a relatively
bad market by identifying a number of buyside and sellside
trading opportunities.
Learn to apply Moving Averages to your trading and investing
by downloading Jeffrey Kennedy’s free 10-page eBook. Here’s
what you’ll learn:
- How to apply the three most popular moving average
techniques.
- How to decide which moving average parameters
are best
for the markets and time framesyou trade.
- How to avoid several common but
dangerous
myths aboutmoving averages.
How You Can Find High-Probability Trading Opportunities Using
Moving Averages now.
This
article was syndicated by Elliott Wave International and
was originally published under the headline The Trend Is Your Friend: How Moving Averages Can Improve Your Market Analysis.
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.
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