COMMONLY USED TECHNICAL INDICATORS

All the moving averages are calculated as the average of a specified number of either low, high or closing prices of the period. The difference between the three types is the weighting or importance placed on each particular period. For example, the weighted and exponential moving averages give greater importance to the latest prices, whereas the simple moving average gives equal importance to all the periods chosen.

Each new point of the moving average drops off the oldest period and brings in the newest period. A moving average line will change depending on the number of periods chosen – the greater the number the slower the average. Some traders will play with a different number of moving averages, all with different periods, until they find a series of moving averages that they feel best indicates the behavior of the particular instrument being studied.

When choosing a moving average to work with, ideally in an upward trending market the current price should not fall beneath the moving average line chosen more than once. The moving average should form a support line during upward trends and a resistance line during downward trends. If the upward trend continues, yet it breaks the moving average line on more than one occasion, then it is a good indication that the moving average line chosen is too fast, and has not been smoothed out enough. If, for example, a 30-day moving average was used, then a 45-day moving average may be more appropriate for this particular instrument.

Once a trader is content with the behavior of the moving average line against the actual prices, he may use the line to signify the continuation of a trend or the end of a trend. If the price closes below the moving average line on two occasions in an upward trending market, it is an indication of the end of the trend and time to exit a long position. The same logic follows in a downward trending market except in reverse: the current price needs to close above the moving average on two occasions to indicate that the downtrend is over.

Another way of using moving averages is in pairs. Many traders will first find the long-term moving average as described above and add a faster moving average (smaller period) as an even earlier indication of the end of a trend. If the shorter moving average crosses the slower moving average, it may signal an earlier exit point for a trend.