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Chapter 11: Moving Averages: Order in the Change

  • Michael C. Thomsett
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Practical Trend Analysis
This chapter is in the book Practical Trend Analysis

Abstract

The moving average (MA) is a statistical tool that evens out a set of values. On a stock chart, those values are based on closing prices over a range of sessions. In reviewing a chart for a volatile stock, it often is difficult to determine the general trend of price; with moving averages it becomes possible to tell not only the direction, but the level of volatility as well. A “moving” average is just that: with the close of each new session, the oldest session is dropped off and replaced with the newest session’s closing price. With price data smoothing through MA, charting is given a specific structure not always available otherwise. The longer the period in the MA, the less responsive it is to change. Newer information that departs from the average will not change the MA line as much as it does in a shorter time frame MA. For example, a fifty-day MA will be more responsive to new information than a two hundred-day MA. This observation explains the technical value of MA analysis: by comparing two different MA lines over a price chart, conclusions can be reached based on how the two MA lines interact, converge, or cross, providing signals or confirmation about direction and potential reversal.

Abstract

The moving average (MA) is a statistical tool that evens out a set of values. On a stock chart, those values are based on closing prices over a range of sessions. In reviewing a chart for a volatile stock, it often is difficult to determine the general trend of price; with moving averages it becomes possible to tell not only the direction, but the level of volatility as well. A “moving” average is just that: with the close of each new session, the oldest session is dropped off and replaced with the newest session’s closing price. With price data smoothing through MA, charting is given a specific structure not always available otherwise. The longer the period in the MA, the less responsive it is to change. Newer information that departs from the average will not change the MA line as much as it does in a shorter time frame MA. For example, a fifty-day MA will be more responsive to new information than a two hundred-day MA. This observation explains the technical value of MA analysis: by comparing two different MA lines over a price chart, conclusions can be reached based on how the two MA lines interact, converge, or cross, providing signals or confirmation about direction and potential reversal.

Chapters in this book

  1. Frontmatter i
  2. Contents v
  3. Introduction to the Second Edition: The Basic Problem with Numbers xi
  4. Chapter 1: The Theory of Trends: Dow, EMH, and RMH in Context 1
  5. Chapter 2: Statistically Speaking: Trends by the Numbers 25
  6. Chapter 3: Resistance and Support: A Trend’s Moment of Truth 53
  7. Chapter 4: Trendlines and Channel Lines: The Shape of Things to Come 73
  8. Chapter 5: Reversal Patterns: End of the Trend 95
  9. Chapter 6: Continuation Patterns: A Bend in the Trend 135
  10. Chapter 7: Confirmation Signals: Turning the Odds in Your Favor 163
  11. Chapter 8: Consolidation Patterns; The Sideways Pause 183
  12. Chapter 9: Volume Signals: Tracking Price Trends 201
  13. Chapter 10: Mind the Gap: When Price Jumps Signal Change 223
  14. Chapter 11: Moving Averages: Order in the Change 241
  15. Chapter 12: Momentum Oscillators: Duration and Speed of a Trend 257
  16. Chapter 13: Volatility: Marking Risk within the Trend 271
  17. Chapter 14: Fundamentals: Connecting the Two Sides 285
  18. Chapter 15: Overview: Putting It All Together 305
  19. Bibliography 319
  20. Index 323
https://doi.org/10.1515/9781547401086-011

Chapters in this book

  1. Frontmatter i
  2. Contents v
  3. Introduction to the Second Edition: The Basic Problem with Numbers xi
  4. Chapter 1: The Theory of Trends: Dow, EMH, and RMH in Context 1
  5. Chapter 2: Statistically Speaking: Trends by the Numbers 25
  6. Chapter 3: Resistance and Support: A Trend’s Moment of Truth 53
  7. Chapter 4: Trendlines and Channel Lines: The Shape of Things to Come 73
  8. Chapter 5: Reversal Patterns: End of the Trend 95
  9. Chapter 6: Continuation Patterns: A Bend in the Trend 135
  10. Chapter 7: Confirmation Signals: Turning the Odds in Your Favor 163
  11. Chapter 8: Consolidation Patterns; The Sideways Pause 183
  12. Chapter 9: Volume Signals: Tracking Price Trends 201
  13. Chapter 10: Mind the Gap: When Price Jumps Signal Change 223
  14. Chapter 11: Moving Averages: Order in the Change 241
  15. Chapter 12: Momentum Oscillators: Duration and Speed of a Trend 257
  16. Chapter 13: Volatility: Marking Risk within the Trend 271
  17. Chapter 14: Fundamentals: Connecting the Two Sides 285
  18. Chapter 15: Overview: Putting It All Together 305
  19. Bibliography 319
  20. Index 323
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