Learning About Moving Averages with a Technical Analysis Course
March 7th, 2010
Many models have a foundation that is on a moving averages system. Some are quite complicated and have many variables . A bead is drawn on a trend direction by most models after it ocurrs and will keep you in the market as long as the trend is unchanged . Some types of moving averages try to predict any trend changes. These are gainful to a trader that is properly capitalized who is able to start a position that is recommended and can underlie more losing than winning trades .
A technical analysis course will teach that the idea behind a moving average ( MA ) is in determining when price direction deviates from recent average prices . As long as the current price remains above the average price of say the last ten, twenty or one hundred days the trend goes on. Most often observed is the ten day MA of closing prices . The advantage to this method is that it gives equal weight to each day’s price . The assumption of the MA is that the trader bestows as much importance on last week’s prices as he does on yesterday’s .
The rules of reality are not obeyed here. There is a limited horizon for a short term trader. Commodity prices do vibrate more rapidly than the prices of most other investment forms , so, usually the best performance is from a shorter series .
An ideal MA should :
1) immediately observe a price trend turn not days after the turn has occured
2) ensure that the MA plot is not too close to the daily price plots that people are lashed into minor swings and consolidation .
3) the moving MA plot has to be adjustable to the commodities volatility .
4) we want responsiveness in the MA plot if the commodity locks limit .
The problem with this approach is that moving average lines may be too languid to show a reversal . More often , the trading decisions of moving average technicians by price market changes in relation to the line of moving averages . The more sensitivity there is with the MA the smaller the advance differential amount and degree will be and the larger the number of sell and buy points , which leads to a lot of whip-saw and some small losses as learned in a technical analysis course.
You will find, as the time span is shorter, the more a trend termination of a reversal can be sensed by the MA. The action on new trends is quicker and getting established doesn’t take as much time. Of course, the trader pays for this sensitivity more often than not because, and to repeat , the shorter the MA the larger the trades that are made with greater commissions added to whip-saw losses .
Therefore , when it comes to the price trend turn, there is a delay with moving averages . Often this delay is larger than you would see with using P&L charting, simple charts, or point and figure charting . The main advantage of this position is that it automatically puts the user aboard every trend of substance ( as all trend following systems do.) More information like this can be obtained from a technical analysis course.
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