Moving Averages: Different Flavors
AAA
  1. Moving Averages: Introduction
  2. Moving Averages: What Are They?
  3. Moving Averages: How To Use Them
  4. Moving Averages: Factors To Consider
  5. Moving Averages: Strategies
  6. Moving Averages: Different Flavors
  7. Moving Averages: Conclusion

Moving Averages: Different Flavors


By Casey Murphy, Senior Analyst ChartAdvisor.com

Most of the methods in which moving averages are used in trading have been addressed within this tutorial, but this tool has also been used in the development of other indicators. In this section, we will give you a basic introduction to a couple of these indicators, but most will require further study if you want to incorporate them into your strategy.

Moving Average Convergence Divergence (MACD)
One of the most popular technical indicators, the moving average convergence divergence (MACD) is used by traders to monitor the relationship between two moving averages. It is generally calculated by subtracting a 26-day exponential moving average from a 12-day EMA. When the MACD has a positive value, the short-term average is located above the long-term average. As mentioned earlier, this stacking order of the averages is an indication of upward momentum. A negative value occurs when the short-term average is below the long-term average - a sign that the current momentum is in the downward direction. Many traders will also watch for a move above or below the zero line because this signals the position where the two averages are equal (crossover strategy applies here). A move above zero would be used as a buy sign, while a cross below zero can be used as a sell signal. (For more on this, read Moving Average Convergence Divergence - Part 1 and Part 2.)

Signal/Trigger Line
Moving averages aren't limited to just stock prices; MAs can be created for any form of data that changes frequently. It is even possible to take a moving average of a technical indicator such as the MACD. For example, a nine-period EMA of the MACD values is added to the chart in Figure 1 in an attempt to form transaction signals. As you can see, buy signals are generated when the value of the indicator crosses above the signal line (dotted line), while short signals are generated from a cross below the signal line. It is important to note that regardless of the indicator being used, a move beyond a signal line is interpreted in the same manner; the only thing that varies is the number of time periods used to create it.

Figure 1

Bollinger Band®
A Bollinger Band® technical indicator looks similar to the moving average envelope, but differs in how the outer bands are created. The bands of this indicator are generally placed two standard deviations away from a simple moving average. In general, a move toward the upper band can often suggest that the asset is becoming overbought, while a move close to the lower band can suggest the asset is becoming oversold. Since standard deviation is used as a statistical measure of volatility, this indicator adjusts itself to market conditions. The tightening of the bands is often used by traders as an early indication that overall volatility may be about to increase and that a trader may want to wait for a sharp price move. (For further reading, check out The Basics Of Bollinger Bands® and our Technical Analysis tutorial.)

Figure 2
Moving Averages: Conclusion

  1. Moving Averages: Introduction
  2. Moving Averages: What Are They?
  3. Moving Averages: How To Use Them
  4. Moving Averages: Factors To Consider
  5. Moving Averages: Strategies
  6. Moving Averages: Different Flavors
  7. Moving Averages: Conclusion
RELATED TERMS
  1. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...
  2. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...
  3. Derived Investment Value (DIV)

    A valuation methodology used to calculate the present value of ...
  4. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified ...
  5. Mass Index

    A form of technical analysis that looks at the range between ...
  6. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  1. What is a common strategy traders implement when using Moving Average Envelopes?

    Read about some of the most common trading strategies and signals you can use with moving average envelopes on an asset's ...
  2. What does a double bottom tell a trader about the overall trend?

    Learn how a double bottom pattern forms on a price chart and why many traders consider double bottoms to be a sign of reversal ...
  3. What are the main differences between a double top and a double bottom?

    Identify double tops and double bottoms, and learn what each could mean for the security's current price trend. Discover ...
  4. What are common trading strategies used when identifying a double bottom

    Use simple, low-risk trading strategies to take advantage of a double bottom formation. Traders typically take one of these ...

You May Also Like

Related Tutorials
  1. Investing Basics

    Industry Handbook

  2. Fundamental Analysis

    Discounted Cash Flow Analysis

  3. The NYSE floor excitement after a rebound. Being a stock trader can be highly gratifying.
    Active Trading Fundamentals

    Introduction to Stock Trader Types

  4. Trading Strategies

    Guide to Pairs Trading

  5. Trading Strategies

    Top Investment Trends For 2013

Trading Center