MOVING AVERAGE INDICATORS
Moving averages are lagging indicators that identify
support levels, resistance levels, and trend direction. MAs
smooth over data into singular lines. If the line is sloping
upwards, it represents an uptrend, and if it is sloping
downwards, it represents a downtrend. These lines then
function as future support and resistance levels. Moving
averages are calculated within a customizable time frame.
The most popular time frames are 5, 10, 15, 20, 50, 100,
and 200 days (for example, one may say they’re looking at
the “50-day moving average”). Different time frames can be
used in conjunction; such crossings signify either a bullish
or bearish move (bullish if the shorter-term MA crosses
above the longer-term MA and bearish if the shorter-term
MA falls below the longer-term MA). The two most popular
moving averages are the simple moving average (SMA) and
the exponential moving average (EMA).
(tradingview.com) Figure 4: Moving Average Indicator Example 6
*buy signals are in green thumbs-up symbols, sell signals in
red.
Here, the 50-day MA and the 200-day MA are shown. Since
the 50-day MA is short-term, it is more aligned with the
price, while the 200-day MA is “smoother” and portrays
more general trends as opposed to smaller-scale
movements. Trading on MAs between the first “buy” signal
and the first “sell” signal would result in a 2x gain, then re-
entering at the second “buy” signal and selling at the
second “sell” would result in a 5x gain. The resulting gain
by trading on all the buy and sell signals would be a 13x,
while simply holding would be a 10x. So, an active trader
would be roughly 30% more profitable by using moving
averages (in this case) than someone simply holding. While
this is by no means the rule, it does nicely display the
benefit that basic technical analysis and moving averages
can bring.
