Simple Moving Averages And Volume Rate-of-Change

By Vinayak on Monday, September 9, 2013 with 0 comments

This article explores moving averages (MA), which may well be the oldest indicator we use. The mathematics behind moving averages and their buy and sell triggers are very easy to comprehend and recognize.

Tutorial: Analyzing Chart Patterns

A Case Study
The MA, regardless of the time period used in the plotting of the indicator, shows us a trend in the form of a single smooth line. Time periods will vary depending on whether the user wishes a short-term trading result or a more long-term investing perspective. The value is the next important part of the equation, and, for the most part, technicians will use the closing price of each session resulting in a simple moving average. By using an end-of-day value for a smooth MA, the average investor can take the time after the markets close in the afternoon to evaluate his or her strategy before the opening bell of the following morning. (For more on SMAs, check out Simple Moving Averages Make Trends Stand Out.)
The first chart shows the performance of Nortel Networks (NT-NYSE) starting from the first few weeks of Aug 2000 to Mar 2003. The chart displays three simple MA. The red line is a 50-day MA, the blue line is a 100-day MA and the purple line is a 200-day MA. You can see the red line is the least smooth of the three. Investors should buy an issue as the price action crosses above the simple MA and sell an issue as the price action crosses below the simple MA.

According to 50-day MA (red line) in the above chart, the best time to look at buying shares of Nortel occurred during the first week of November 2001, when the line was at about the $6.45 level.

Using the 100-day MA (blue), investors would have come back into the market on or about November 13, 2001, at the $7.50 level. And lastly, an investor using a 200-day MA (purple), for a more long-term trend approach, would not have considered buying Nortel Networks because the price action did not penetrate the MA during the short time period of bullish pricing. (Learn more about using moving averages in Moving Average Envelopes: Refining A Popular Trading Tool.)


For the investors who jumped into NT, the sell signals came just a few weeks after the buy signals. The first sell signal came on January 16, 2002, when the price action dropped below the 50-day MA and Nortel Networks closed at $7.27. On February 5, those investors using a 100-day MA would have received their first signal when Nortel closed at $6.20. Very little money was made by investors using these moving averages during this period of time.
http://www.investopedia.com/articles/technical/03/032803.asp
 

Category: Analysis

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