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Professional Trader Series:
Moving Average Formula
& Strategy Guide
by John PersonMOVING AVERAGE FORMULAS & STRATEGY GUIDE
In an online seminar conducted for the Chicago Board of Trade, I shared how to apply Moving Averages to help traders determine buy and sell decisions and how to apply them in order to build a systematic trading method. In addition, I gave insights on how to effectively apply filters for buy and sell signals using popular indicators such as Stochastics and MACD. So goes the adage that there is no holy grail for any one single trading indicator or style. I believe traders should use multiple indicators to help decipher trading signals for various market conditions. I believe a successful trader needs to be aware of the fact that market conditions change, as does the markets state of volatility. Mostly this happens due to peoples perception on a product's given value or anticipated value in any given time. I believe that combining Moving Averages with indicators such as Stochastics and MACD during certain market con-ditions can be vital to your success in discovering trend and consolidation phases and for determining various signals such as divergences or convergences. They both can be used for pinpointing reversals. The one fact is that in trending markets MACD can be your friend in helping you to stay in a trade longer based on the fact that this indicator is built on moving average values.
In this booklet I would like to review and cover:
. What is a Moving Average? . How many types of moving averages are there to use. . How to calculate a moving average.. Which inputs to average?. Time dimensions for moving averages.. Cross over signals.. Moving average channels. . Filters on moving average signals using Stochastics, MACD and other indicators.. Use of Fibonacci as moving average settings.. Use of Pivot Points as a moving average system.
Simply put Moving Averages are a math calculation that averages out a series of numeric values. A moving average series can be calculated for any time series. In finance it is most often applied to stock and derivative prices, percentage returns, yields and trading volumes. There are three universal types of moving averages to calculate. The simple moving average is one of the most popular indicators used and is easy to calculate. There is also a weighted and an exponential moving average which are more sensitive to price fluctuations but more complicated to formulate.
Copyright @ 1999-2007 by John L Person III, Palm Beach, FL 33480. The opinions presented, are for informational purpose only. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
It is unlawful to reproduce, distribute or exhibit this material to anyone other than the individual assigned. You cannot reproduce this material without express written consent of the author, John L. Person.
2Here is how to calculate a Simple Moving Average (SMA). If we take the close of the last ten periods add them together then divide by ten we get the mean or average of the last ten periods. As a new period is added we drop the oldest time period.
Periods: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 =
13600, 13620, 13615, 13580, 13565, 13600, 13610, 13650, 13660, 13650,
Sum = 136150 ÷ 10 = 13610
A weighted average is any average that has multiplying factors to give different weights to different data points. But in technical analysis a weighted moving average (WMA) has the specific meaning of weights which decrease arithmetically. Weighted M/A's give a greater weight to more recent price data. These are complicated and need the aid of a computer.
WMA = the latest day has weight n, the second latest n-1, etc, down to zero.
Exponential moving averages (also called exponentially weighted moving averages). The EMA applies weighting factors which decrease exponentially. EMA's reduce the lag by applying more weight to recent prices relative to older prices. The shorter the EMA's period, the more weight that will be applied to the most recent price.
EMA = (Price (current) - EMA (previous) (x Multiplier) + EMA (previous)
Pros
Defines average price changes over time and smoothes out trading noise.Excellent trend trading tool.Used to identify, triggers, entries, support and res... [download for more]
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