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EDUCATIONAL MATERIAL TECHNICAL ANALYSIS OF CHARTS LESSON 1 - Mov

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EDUCATIONAL MATERIAL TECHNICAL ANALYSIS OF CHARTS LESSON 1 - Moving Averages

Moving average
Moving averages are certainly one of the most frequently used technical analysis tools. This is due to their relatively easy calculation (which was important when computers were not as advanced             as today), as well as the ability to "smooth out" the chart, which is important when determining the trend and determining input and output signals from the market.

While working on this issue I based mainly on sources available on the Internet and on the book considered to be the AT bible, i.e. Technical analysis of financial markets of J. J. Murphy. I made my own observations while testing strategies using moving averages (Amibroker, Metastock).

So what is the rolling average?
It is a curve imposed on the price chart. We call it an average, because (in its simplest form) it consists in adding closing prices from the last n periods, and then dividing the number obtained by n. That is exactly as we counted our average grades at school. It is called a rolling one, because a different (most recent) data set is used for its calculation each time. Therefore, counting the moving average of 10 days, we take into account the average of today's closing and the last 9 days. Tomorrow new data will come, but the average range does not change, which means that data from the most distant day are rejected and no longer affect the average.

On the basis of the above, it should be emphasized that the moving average shows us only what it was. Only observation of its use for a long time shows that certain elements are repeated, which makes it possible to use moving averages to multiply our capital.

So let's see how this average looks like:

Using two moving averages

This method allows you to eliminate false hits and confirm large price movements. In relation to the use of one average, we include a lot less transactions and at the same time they are "more certain". The disadvantage of this approach is the omission of smaller trend changes that could potentially be made using a more sensitive system. Here is an example when using two SMAs:



The buy signal occurs when you cut from the bottom of the longer average for a shorter one. Sales when SMA 20 tops SMA 50.

This system shows us clearly how great smoothing is the use of a double cut. We avoided paying commissions multiple times, as well as losses resulting from the purchase / sale (between the signal and the purchase, the prices change, usually to our disadvantage).

Some also use the triple cut method (three moving averages at different times), which additionally assures us that the generated signal is real.

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