Moving Average
- definition by Wikipedia
- Phil Town: When the price line crosses above the moving average line, buy. When th eprice line crosses
below the moving average line, sell.
- Parameters by Phil Town: I like to use a 10-day moving average because, unlike the MACD and Stochastic,
I want this Tool to give me an early signal.
30-DAY VS. 10-DAY MA
by Phil Town on October 24, 2006.
Source: Phil Town's blog article
I'm afraid I made a bit of an error in not insisting on a 30-day MA for you guys. I was swayed by the fact that MSN doesn't have one, and because a 50-day MA is slow.
I like the 10-day, but it can get you hammered. It puts out more false signals. Therefore it becomes more like a buy and hold in a sense. That means you have to be all that more certain that (a) it's a great business, and (b) that it's really on sale.
Determining a great business is pretty straightforward, but in this market we are buying stocks that can go down like a brick simply because the market hasn't really dumped like it did in the 70's and early 80's when Buffett bought up all his bargains. We are pricing businesses based on certain expectations of future growth -- which in the short run sometimes cannot be achieved. And in this market, when expectations fall short, the sheep run for the woods. Thus the need to get out when they do.
But, having heard the various sufferings brought on by the 10-day, I now recommend it only for those of you who don't want to miss much of the big upsurge because you know it can't go down.
For everyone else, stick with a 30-day MA.
Moving average
In statistics, a moving average or rolling average is one of a family of similar techniques used to analyze time
series data. It is applied in finance and especially in technical analysis. It can also be used as a generic smoothing
operation, in which case the raw data need not be a time series.
A moving average series can be calculated for any time series. In finance it is most often applied to stock prices,
returns or trading volumes. Moving averages are used to smooth out short-term fluctuations, thus highlighting longer-term
trends or cycles. The threshold between short-term and long-term depends on the application, and the parameters of the
moving average will be set accordingly.
Mathematically, each of these moving averages is an example of a convolution. These averages are also similar to the
low-pass filters used in signal processing.
Prior moving average
A simple moving average (SMA) is the unweighted mean of the previous n data points. For example, a 10-day simple moving
average of closing price is the mean of the previous 10 days' closing prices. If those prices are pM, pM − 1... pM − 9 then
the formula is
When calculating successive values, a new value comes into the sum and an old value drops out, meaning a full summation
each time is unnecessary,
In technical analysis there are various popular values for n, like 10 days, 40 days, or 200 days. The period selected
depends on the kind of movement one is concentrating on, such as short, intermediate, or long term. In any case moving
average levels are interpreted as support in a rising market, or resistance in a falling market.
In all cases a moving average lags behind the latest data point, simply from the nature of its smoothing. An SMA can
lag to an undesirable extent, and can be disproportionately influenced by old data points dropping out of the average. This
is addressed by giving extra weight to more recent data points, as in the weighted and exponential moving averages.
One characteristic of the SMA is that if the data has a periodic fluctuation, then applying an SMA of that period will
eliminate that variation (the average always containing one complete cycle). But a perfectly regular cycle is rarely
encountered in economics or finance.
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