| Equity Based Analysis > Technical Analysis > Indicators > Moving Averages |
Moving averages provide different options for smoothing data. Data is smoothed in order to help reduce the effect of bar-to-bar price fluctuations and help identify longer term trends.
A moving average reveals the general direction and strength of a stock's price trend over a given period. The term "Moving" is used to refer to the fact that the window of bars that we are considering remain fixed in width (Period) but moves forward with subsequent bar. Some of the averaging methods however are not so much "Moving" as they are "Cumulative" (exponential for one).
The following Price options are available as the input data for each smoothing type: Open, Close, High or Low. In addition, the MA function can be used in EquityRT Function Language to smooth just about anything. For instance, if you wanted to smooth Rate of Change, you would simply use the syntax MA(ROC).
The moving average technical indicator in EquityRT supports eleven distinct moving average types:
1. Moving Average - Simple (SMA)
2. Moving Average - Exponential (EMA)
3. Moving Average - Weighted (WMA)
4. Moving Average - Variable (VMA) = Variable Index Dynamic Average
5. Moving Average - Time Series (TSMA)
6. Moving Average - Welles Wilder’s (WWMA)
7. Moving Average - Kaufman’s Adaptive (KAMA)
8. Moving Average - ZeroLag Exponential (ZEMA)
9. Moving Average - Triangular (TMA)
10. Moving Average - Volume Adjusted (VAMA)
The number of periods used in a moving average will vary according to the security's volatility, trendiness and personal preferences. The more volatility there is, the more smoothing that will be required and hence the longer the moving average. Stocks that do not exhibit strong characteristics of trend may also require longer moving averages.
There is no one set length, but some of the more popular lengths include 21, 50, 89, 150 and 200 days as well as 10, 30 and 40 weeks. Short-term traders may look for evidence of 2-3 week trends with a 21-day moving average, while longer-term investors may look for evidence of 3-4 month trends with a 40-week moving average.
Trial and error is usually the best means for finding the best length. Examine how the moving average fits with the price data. If there are too many breaks, lengthen the moving average to decrease its sensitivity. If the moving average is slow to react, shorten the moving average to increase its sensitivity. In addition, you may want to try using both simple and exponential moving averages. Exponential moving averages are usually best for short-term situations that require a responsive moving average. Simple moving averages work well for longer-term situations that do not require a lot of sensitivity.
Moving averages can be effective tools to identify and confirm trend, identify support and resistance levels, and develop trading systems. However, traders and investors should learn to identify securities that are suitable for analysis with moving averages and how this analysis should be applied. Usually, an assessment can be made with a visual examination of the price chart, but sometimes it will require a more detailed approach. The Average Directional Index, is one tool that can help identify securities that are trending and those that are not.
Moving averages will help ensure that a trader is in line with the current trend. However, markets, stocks and securities spend a great deal of time in trading ranges, which render moving averages ineffective. Once in a trend, moving averages will keep you in, but also give late signals. Don't expect to get out at the top and in at the bottom using moving averages.
As with most tools of technical analysis, moving averages should not be used on their own, but in conjunction with other tools that complement them. Using moving averages to confirm other indicators and analysis can greatly enhance technical analysis.
Inputs:
Price Field = Close
Indicates Open, High, Low or Closing price.
Period = 14
Indicates time period(the number of days for daily analysis, the number of weeks for weekly analysis, etc.).
Method = Indicates one of the 11 moving average types listed above.
Vertical Shift % = 0 (Valid only in MyChart.)
Used to shift upper and lower bands upwards or downwards.
Horizontal Shift = 0 (Valid only in MyChart.)
Used to shift the values backward or forward on the time scale.
Indicator Type: Trend