Chapter 12

Using Dynamic Lines

In This Chapter

Going over the simple moving average

Getting to know a few other moving averages

Working with more than one moving average

Finding out about convergence and divergence

Moving averages are the workhorses of technical analysis. Most traders start out in technical analysis with moving averages, and some traders never see a need to look into any other technique — that’s how successful moving averages can make your trading.

A moving average is an arithmetic method of smoothing price numbers so that you can see and measure a trend. A straight line (see Chapter 10) is a good visual organizing device, but a dynamic line — the moving average — more accurately describes what’s really going on. In addition, you don’t need to choose starting and ending points, removing that aspect of subjectivity, although choosing how many periods to put in your moving averages is subjective. In this chapter, I discuss several different ways you can calculate and use moving averages to get buy/sell trading signals.

warning_bomb.eps Be careful not to attribute a forecasting capability to the moving average. Moving averages are trend-following. The moving average is a lagging indicator — it can still be rising after your price hits a brick wall and crashes.

Introducing the Simple Moving Average

You know what an average is — you measure ten of something, add up the measurements, ...

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