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Moving Average Indicator Moving averages provide an objective measure of trend direction by smoothing price data. Moving Average Time Frames Shorter length moving averages are more sensitive and identify new trends earlier, but also give more false alarms. Longer moving averages are more reliable but less responsive, only picking up the big trends. Use a moving average that is half the length of the cycle that you are tracking. If the peak-to-peak cycle length is roughly 30 days, then a 15 day moving average is appropriate. If 20 days, then a 10 day moving average is appropriate. Some traders, however, will use 14 and 9 day moving averages for the above cycles in the hope of generating signals slightly ahead of the market.
Others favor the Fibonacci numbers of 5, 8, 13 and 21. 5 to 20 Days for short cycles. Go long when price crosses to above the moving average from below. Go short when price crosses to below the moving average from above. The system is prone to whipsaws in ranging markets, with price crossing back and forth across the moving average, generating a large number of false signals. For that reason, moving average systems normally employ filters to reduce whipsaws. More sophisticated systems use more than one moving average.
Two Moving Averages uses a faster moving average as a substitute for closing price. Three Moving Averages employs a the third moving average to identify when price is ranging. Multiple Moving Averages use a series of six fast moving averages and six slow moving averages to confirm each other. Displaced Moving Averages are useful for trend-following purposes, reducing the number of whipsaws. Keltner Channels use bands plotted at a multiple of average true range to filter moving average crossovers. Moving Average Types There are several different types of moving averages, each with their own peculiarities.
Simple moving averages are the easiest to construct, but also the most prone to distortion. Weighted moving averages are difficult to construct, but reliable. Exponential moving averages achieve the benefits of weighting combined with ease of construction. Wilder moving averages are used mainly in indicators developed by J. Essentially the same formula as exponential moving averages, they use different weightings — for which users need to make allowance. Setup Indicator Panel shows how to set up moving averages. The default setting is a 21 day exponential moving average.
Learn how to manage your market risk. Trading and the Economy, as well as new software updates. Manage risk and improve your market timing with Colin Twiggs’ weekly review of macro-economic and technical indicators. Copyright 2001 – 2018 Incredible Charts Pty Ltd. You’ve tried a number of strategies but they never quite seem to work as well as you expected them to – but you feel close to success? You work full-time, and know that if you just had more time to learn a good strategy and trade it, you would really be on your way to consistent profits? You have realised that trading is not quite as easy as finding a ‘robot’ or ‘automated’ system – but you’ve not been able to find a trading strategy that you are really confident in?