Simple, Geometric, Weighted, Linearly Weighted, Exponentially Weighted, Triangular and Median moving average indicators and associated procedures.
For a list of all members of this type, see MovingAverage Members.
System.Object
MovingAverage
Moving Averages in there various forms are used to smooth data so that the underlying trend
is more discernible. The sensitivity of the moving average measure will depend on the number of
historical values used. In particular, if relatively few historical values are used (say 5
periods), then the moving average will ascertain trends over that period. Similarly if a moving
average is considered over a longer time frame (say 20, 120 or 200
periods) then the moving average will ascertain trends over the longer time frame and tend to
iron out any trends over shorter time frames.
For this reason it is important to consider the moving average which
considers the number of periods in accordance with your time horizon
over which you to trying to discern trends within the underlying time series.
For example, if you wish to benefit from the longer term general trend
of say they Dollar/Euro exchange rate then you may wish the evaluate the
6-month (i.e. 120 trading period) and 200-period
(i.e. roughly correspondingly to 1-years trading periods which
is general taken to be 252) moving averages over a given
period. Now if the values of the moving averages are generally
trending higher then the underlying trend is up. Similarly, if the values
of the moving averages are generally trending lower then the underlying
trend is down.
Selecting the type of moving average to use and then the number of periods to consider for a given moving average is more of an art than a science. Often personal preferences and past experience (good and bad) will play a significant part with any selection. Having said that it is often advisable to plot the Moving Average over time frames for which different sectors of the market are forced to work by, in particular:
5 periods (i.e. 1 trading week): Short term traders
and market makers often have a weekly outlook on the market and in particular will often
try at least the square positions before the week-end break. Therefore,
a 5-period average will help to eliminate these short term influences.25 periods (i.e. 1 month): This indicator may be used by fund managers
wishing to judge to median term trend for the purpose of making buy and
sell decisions.120 periods (i.e. 6 months): Much of the financial reporting which takes
place is offered on the six monthly basis. Hence, a 6 monthly moving average
can be considered as describing the trend over the last reporting period.200 periods (i.e. 1 year): This moving average would be used to identical
the long term trend which for example may be due to the influences of the phase
of the business cycle.Moreover, even if you are not personally interested in keeping track of the moving averages with respect to these particular periods because they are so widely used by market participants in order to appreciate others market interpretations and market dynamics it is often beneficial to at least view them from time to time.
The qualitative difference between moving averages of differing periods is the degree of sensitivity they have to changes in the underlying data. When relatively few values are used the moving average may itself oscillate rapidly and give many force signals to the start of trending markets. If a relatively large number of periods is used used fewer force signals will be generated but a trend may in well into its cycle before it is detected and conversely when the trend finishes or changes direction the indicator will take correspondingly longer to reflect this.
The exact number of periods which are considered to be a relatively few or many periods will naturally depend on the situation and perspective of the user and the data set used.
With the construction of the moving averages themselves the main significant difference between the types of moving average (i.e. SimpleMovingAverage, GeometricMovingAverage, etc) with the exception of the Median moving average is the weight assigned to each data element of the data series for which the moving average is evaluated. (The Median Moving average in slightly different in that it should be seen as the Simple Moving Average on filtered data.) Simple moving averages apply equal weight to all historical prices. Exponential and weighted averages apply more weight to recent prices. Triangular averages apply more weight to prices in the middle of the time period and variable moving averages change the weighting based on the volatility of prices.
When the moving average is higher than the underlying data series then the underlying data series (for example, price series) is said to be in a bearish trend (i.e. trending down) and when the underlying data series asset is above the moving average then it is said to be in a bullish trend (i.e. trending up-wards).
Moving Averages are also used in pairs and even triples. When using a pair of moving averages of the same type where one moving average uses fewer periods and hence is more sensitive, the underlying asset is said to be in bullish mode if the moving average using the fewer number of periods crosses above the less sensitive moving average which is using more periods. Conversely, if the less sensitive moving average crossed above the more sensitive moving average then asset is said to be in a bearish mode.
Remark: All moving averages are lagging indicators and hence will miss the first part of a trend and over-run the same trend. There is also a play-off in the number of periods used which determines the sensitivity of the indicator.
Say we are considering a stock price where we are provided with the daily closing price series. Now if you decide to use for example the 5-period Simple Moving Average to determine the short term trend, then from the following values of the moving average we are able to conclude:
Namespace: Indicators
Assembly: WebCab.DelphiWebServices.TA (in WebCab.DelphiWebServices.TA.dll)
MovingAverage Members | Indicators Namespace