Moving Averages: Different Flavors
  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. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following ...
  2. Bollinger Band®

    A band plotted two standard deviations away from a simple moving ...
  3. Signal Line

    A moving average plotted alongside a technical indicator and ...
  4. Exponential Moving Average - EMA

    A type of moving average that is similar to a simple moving average, ...
  5. Trigger Line

    A moving-average line found in the moving average convergence ...
  6. Ease Of Movement

    A technical momentum indicator that is used to illustrate the ...
RELATED FAQS
  1. How do I create a trading strategy with Bollinger Bands® and moving averages?

    Learn more about how to identify buy and sell trading signals when implementing a moving average crossover strategy with ... Read Answer >>
  2. Why is the Moving Average Convergence Divergence (MACD) important for traders and ...

    Take a look inside one of the most popular and widely trusted technical indicators, the moving average convergence divergence, ... Read Answer >>
  3. How do I create a trading strategy with Bollinger Bands® and the MACD?

    Learn how to establish profitable trading strategies using technical trader favorites such as Bollinger Bands and the moving ... Read Answer >>
  4. How are moving averages used in trading?

    Moving averages are very popular tools used by technical traders to measure momentum. The main purpose of these averages ... Read Answer >>
  5. What are the most common momentum oscillators used in forex trading?

    Explore two frequently used momentum indicators in forex trading, the moving average convergence divergence, or MACD, and ... Read Answer >>
  6. What is the difference between Moving Average Envelopes and Bollinger Bands®?

    Read about the differences between how Bollinger Bands and moving average envelopes are constructed and what that means for ... Read Answer >>

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