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The Visual Investor: How to Spot Market Trends, Second Edition by JOHN J. MURPHY

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CHAPTER 4
Your Best Friend in a Trend
The first three chapters cover a fair amount of ground. You could stop reading here and still do a fair job of visual market analysis simply by studying the trend of the markets, knowing where the support and resistance levels are located, drawing some trendlines, and being able to spot important chart patterns. There are additional indicators, however, that help the analyst track existing trends and that signal when those trends are reversing or losing momentum. This brings us to the moving average, which works especially well in a trending market.

TWO CLASSES OF INDICATORS

Moving averages, like trendlines, help measure the direction of existing trends and can help determine when a trend change has taken place. Moving averages also act as support and resistance levels. Moving averages, as helpful as they are, are lagging indicators. They confirm that a trend change has occurred, but only after the fact. Another class of indicator—oscillators—helps determine when a market has reached an important extreme on either the upside or the downside. The oscillator tells us when a market is overbought or oversold. The major value of oscillators is that they are anticipatory in nature. They warn us in advance that a market has rallied too far, and are often able to anticipate a market turn before it actually happens.
In this chapter, we explain the various ways moving averages can be used as a trend-following indicator. You’ll also learn how moving ...

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