Stock Technical Analysis Course - Describing Moving Averages

Most models are founded on moving averages . Some are quite complicated and ingest large numbers of variables . Most models draw the bead on trend directions after it ocurrs and as long as the trend doesn't change will keep traders in this market . Some 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 may be beneath more losing trades.

A stock technical analysis course teaches that the rationale behind the 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 the past 10-100 days the trend continues . Most often observed is the 10 day MA of the closing prices. The benefit of this method is that it gives equal weight to each day's price . The assumption of the MA is that traders put as much importance on the prices of last week as yesterday's prices .

The rules of reality are not obeyed here. A short term trader's horizon is extremely limited . As compared to other investment forms, commodity prices more rapidly vibrate, so, shorter series usually will do the best.

The best MA should :

1) immediately observe a price trend turn not days after the turn has occured
2) the MA plot shouldn't be so close to the daily prices plots that we would be whip-sawed in consolidation and minor swings .
3) the moving MA plot must be adaptable to the volatility of the particular commodity .
4) if the commodity locks limit the MA plot should be responsive .

The short comings to this approach is that moving average lines may be too languid to show a reversal . More often , moving average technicians tend to be guided in their trading decisions by changes that occur in the price market based on the line of MA. 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 stock technical analysis course.

However , as the time span is shorter, the more a trend termination of a reversal can be sensed by the MA. New trends are acted on more quickly and do not need much time to establish themselves . Of course, the sensitivity is paid for by traders due to the fact that, the shorter the moving average the greater is the number of trades that will be made with the addition of greater commissions to the whip-saw losses .

So , moving averages has a delay in showing price trend turns. The delay is usually great than that which occurs when using P&L charting, simple charts, or point and figure charting . The main advantage of this position is that users are automatically put on board for each trend with substance (as do all trend following systems .) More information like this can be obtained from a technical analysis course.

By: Charles Drummond

Article Directory: http://www.articledashboard.com

Author: Charles Drummond is a Canadian trader who has written nine books about trading and has created a stock technical analysis course called “Drummond Geometry.” His biography and further information about his work can be found at the stock technical analysis course website.