Moving Averages

Although stock and commodity prices follow trends higher and lower, they can be quite volatile. For example, the long-term trend in stocks from 1982 through 2000 had been up, but medium- and short-term trends, such as the extreme events of October 1987, can move in exactly the opposite direction. To smooth out this volatility, the moving average is used. Often, it can take the place of trendlines.

This topic is included in this chapter because it is required for the explanation of further concepts.

Simple Moving Averages

There are several types of moving averages currently in use. The most basic is the simple moving average, which takes the prices from the previous user-defined number of periods, sums them up, and divides by ...

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