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Lesson 2- Moving Averages

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Published on Nov 15, 2007

Moving averages are one of the most basic tools in technical analysis. The moving averages are a lagging indicator and do not predict trend, but confirm trend once it has been established. The calculations smooth out day-to-day price fluctuations and reduce noise.

You can use moving averages in simple, exponential or weighted form.

1.Simple -- computes the averages (mean) of the closing price over the chosen amount of periods (tick/bars) and displays in a joined smooth curving line. Short term: 10-30 days, Intermediate term: 30-100 days, Long term: 100-200+. Sum of all closing prices divided by number of closing prices in specific period.
2.Exponential -- applies more weight to recent prices in comparison older prices. Found by applying a percentage of today's closing price to yesterday's closing moving averages.
3.Weighted -- gives current data more weight than older data. Older data is considered of less value/significance. Each price in a series is multiplied by the number of periods preceding it: the old the price the smaller its multiplier.

What can I use this for? The moving averages can be used for various task, but it is suggested that they are used with other technical indicators. The great thing about moving averages is that they simplify data for the eyes.

1.Support -- look for price reversing when it moves close to a longer term moving average line.
2.Resistance- when the price comes close to the line of moving average, traders will sell in hopes of taking profits at the top of a natural resistance level.
3.Crossover -- Moving averages can be used as basic buy/sell points by detecting crossovers when the moving averages line crosses above and below the price bars
4.Crossover on Moving Average Ribbons -- When two different moving averages crossover one another, this can signal a possible reversal.

You can use MarketClub to analyze moving average. Select the studies list and choose moving averages. You can add, delete or cancel various moving average. Simply fill in period, and choose moving average form. Repeat previous steps if you would like to add multiple moving averages.

If you are interested in moving average you may also want to study the ADX indicator.

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