A_N_Dudeen1980
03-26-2019, 06:55
Simply, the moving averages are the total prices during a given period divided by the total of time units. If we assume that the movement of a certain stock for five days shows that it has recorded the following closing prices:
Monday: $ 1.23
Tuesday: $ 1.86
Wednesday: $ 2.10
Thursday: $ 2.25
Friday: $ 1.75
Then simply, the moving average of that stock for five trading days will be: ($ 1.23 + $ 1.86 + $ 2.10 + $ 2.25 + $ 1.75) / 5 days = $ 1.84
This is the basic formula to calculate the moving averages beside other methods which are beyond the scope of this article which, in turn, introduces a new perspective for the reading of moving averages and using them in trading.
Let us now have a look on the gold daily chart where we put the simple moving average for 360 periods \ days:
48847
We see several tops and bottoms during the mid of 2017 till present, but we can also note that seemingly, the price and moving average has a mutual relationship:
The moving average is created by price action at a certain time ..
Then the moving average effects its creator (price action) by acting like support or resistance levels sometimes and by acting as a moving gravity center at all of times ..
It is obvious that there is a maximum limit for the distance which price can go above or under the moving average and afterwards, it has no option but to go back to the moving average.
What would happen if we apply moving averages for shorter periods?
If we add the moving average for 30 periods \ days to the aforementioned chart, we will have the following:
48848
We can, again, note how the “minor” tops and bottoms, if so to speak, are subject to the same situation where they have a maximum limit to move above or under the moving average.
How can this conclusion be availed for trading? simply, by trying to specify when the price is at its maximum distance from the moving average to use these levels as entry points and the moving average to which the return of price is inevitable as a take profit \ exit point.
This will be the subject of the coming article.
Monday: $ 1.23
Tuesday: $ 1.86
Wednesday: $ 2.10
Thursday: $ 2.25
Friday: $ 1.75
Then simply, the moving average of that stock for five trading days will be: ($ 1.23 + $ 1.86 + $ 2.10 + $ 2.25 + $ 1.75) / 5 days = $ 1.84
This is the basic formula to calculate the moving averages beside other methods which are beyond the scope of this article which, in turn, introduces a new perspective for the reading of moving averages and using them in trading.
Let us now have a look on the gold daily chart where we put the simple moving average for 360 periods \ days:
48847
We see several tops and bottoms during the mid of 2017 till present, but we can also note that seemingly, the price and moving average has a mutual relationship:
The moving average is created by price action at a certain time ..
Then the moving average effects its creator (price action) by acting like support or resistance levels sometimes and by acting as a moving gravity center at all of times ..
It is obvious that there is a maximum limit for the distance which price can go above or under the moving average and afterwards, it has no option but to go back to the moving average.
What would happen if we apply moving averages for shorter periods?
If we add the moving average for 30 periods \ days to the aforementioned chart, we will have the following:
48848
We can, again, note how the “minor” tops and bottoms, if so to speak, are subject to the same situation where they have a maximum limit to move above or under the moving average.
How can this conclusion be availed for trading? simply, by trying to specify when the price is at its maximum distance from the moving average to use these levels as entry points and the moving average to which the return of price is inevitable as a take profit \ exit point.
This will be the subject of the coming article.