Technical Analysis For Dummies, 4th Edition

Chapter 12

Using Dynamic Lines

IN THIS CHAPTER

Going over the simple moving average

Getting to know a few other moving averages

Finding out about convergence and divergence

Prices don’t move in straight lines. To make a more dynamic (and realistic) indicator, you want lines that move along with the price move. Enter the moving average.

The moving average is the workhorse of technical analysis. Most traders start out in technical analysis with moving averages, and some never see a need to look at any other technique. The charts accompanying most commentary usually contain moving averages, despite some whippersnappers dismissing averages as “old school” because moving averages lag. Well, all indicators lag to some extent. Indicators are constructed from past prices and can hardly do anything but lag.

A moving average is an arithmetic method of smoothing price numbers so that you can see and measure a trend. A straight line 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 ...