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Understanding Moving Averages - Part I, The Basics Topic Rating:
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Craig_S
Posted : Tuesday, March 22, 2005 12:21:36 PM


Worden Trainer

Joined: 10/1/2004
Posts: 18,819

A beginner's introduction to moving averages.







If you prefer, you can download the video and watch it offline. Choose the Save option and save it to your hard drive. Extract the files to a location on your hard drive and double click on the .html file to launch the video. You must extract the files to your hard drive. You cannot play the video from the .zip file.



cross crossing visual sorting moving average averages

- Craig
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To view this video you must have Macromedia Flash Player and Microsoft Internet Explorer 5+
bustermu
Posted : Wednesday, March 23, 2005 8:31:46 AM
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Joined: 1/1/2005
Posts: 2,645
Craig,

The three fundamental building blocks for plotting Moving Averages (MA) in TC2005 are:

1) Simple Moving Average (SMA)
2) Exponential Moving Average (EMA)
3) Moving Linear Regression (LRMA)

You have omitted the LRMA in Part I. Was that just an oversight?

Of course, one can use cascades of these three, or resort to Custom Indicators to construct all possible MAs, nonlinear, adaptive, or whatever. Hopefully, this will be mentioned in future Parts.

Thanks,
Jim Murphy
Craig_S
Posted : Wednesday, March 23, 2005 8:54:21 AM


Worden Trainer

Joined: 10/1/2004
Posts: 18,819
Moving Linear Regressions will get their own video in time. "Understanding Moving Averages" is a two-part series focusing on simple and exponential moving averages. The second part will cover (among other things) using two moving averages.

This video is the first in a planned "understanding" series covering the bare basics of how the non-proprietary indicators are constructed in TeleChart. They will target users new to the indicators. All of the videos will be short and focused.

In my years teaching for Worden, I met many customers using the indicators in the system without understanding how they are constructed or what they reveal. There will be no interpretation in the videos, just the facts so people understand what they are using.

The series will not get into custom indicators. I expect videos on custom indicators will be made at some point.

Did you enjoy this one?

BTW, here are some PCF templates to play with. These use a 20-day simple MA. To change them to exponential, put an X before every AVG (XAVG instead of AVG). You can change the period of the MA by changing the 20s.

Price above the 20sma
C>AVGC20

Price as a % of 20sma
100*C/AVGC20

Price crossing up thru 20sma
C>AVGC20 AND C1<AVGC20.1

Price crossing down thru 20sma
C<AVGC20 and C1>AVGC20.1

Price above 20sma for 10 days
C>AVGC20 AND C1>AVGC20.1 AND C2>AVGC20.2 AND C3>AVGC20.3 AND C4>AVGC20.4 AND C5>AVGC20.5 AND C6>AVGC20.6 AND C7>AVGC20.7 AND C8>AVGC20.8 AND C9>AVGC20.9

- Craig
Here to Help!
bustermu
Posted : Wednesday, March 23, 2005 9:56:13 AM
Registered User
Joined: 1/1/2005
Posts: 2,645
QUOTE (Craig_S)
Did you enjoy this one?


Yes, I did. Thanks.

It is often said that (MA) lag is the enemy of the trader. LRMA and cascades of it are the only built in Zero-Lag MAs TC2005 has. I perfer other Zero-Lag MAs, but they must be built as Custom Indicators.

As a side note on comparing SMAs and EMAs, suppose I could trade the output of the MAs. The results would be:

SMA - I would be wealther than Bill Gates in a week.

EMA - I would get wealthy, but it would take considerably longer.

The moral of this story is do not use an SMA when what you are interested in is how it changes with time. That is not to say do not use an SMA for other purposes.

I would like to see this story told to every beginner since they ordinarily do not have the knowledge to know when not to use an SMA.

Thanks,
Jim Murphy
james9898
Posted : Monday, October 10, 2005 12:51:02 PM
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Joined: 2/21/2005
Posts: 24
It appears to me that in the last post, the SMA and the EMA statements are contradicted in the moral of the story. What am I misunderstanding in the post?

Thanks!
bustermu
Posted : Tuesday, October 11, 2005 8:35:20 AM
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Joined: 1/1/2005
Posts: 2,645
james9898,

The SMA is subject to large highly predictable changes at times. When these happen, it tends to obscure the influence of the new data on the changes in the moving average.

This is desirable if you could trade the SMA but I doubt many would find it desirable for Technical Analysis purposes.

Let's illustrate a difference in an SMA and an EMA. Suppose you calculate the chances of C crossing SMA10 tomorrow to be 90%. Why would you wait to see if it does? Suppose you calculate the chances of C crossing EMA10 tomorrow to be 90%. Check your calculations, you have made a mistake.

Thanks,
Jim Murphy
Craig_S
Posted : Tuesday, October 11, 2005 8:47:59 AM


Worden Trainer

Joined: 10/1/2004
Posts: 18,819
james9898,

Here is the thing to keep in mind about a simple moving average (I will use a 5-day SMA to illustrate):

Let's say the last five closings on a stock are this:

50.00
75.00
78.00
70.00
73.50

The SMA for today would be these five values added up and divided by five:

69.30

Now move forward a day.... it is pretty safe to say the SMA will be moving up in value on this new day because the 50.00 (the point 4 days ago) is going to be droppped from the average. For the SMA value of 69.30 to stay the same or drop the stock would need to close at 50.00 or less. If the stock were to drop from 73.50 to 60.50 today the value of the SMA would still go up because you are replacing the 50.00 with today's 60.50. The stock is dropping 13 points yet the SMA is going to be rising.

This is not the case with an EMA. An EMA puts more weight on the recent data so the older data that isn't being "dropped" and replaced with equally weighted new data. A 5-day SMA has only the most recent 5-days in its calculations. A 5-day EMA has closes well beyond the last five in its calculation but the most recent closes are having the biggest effect.

Does this mean SMAs are bad or broken... no. A 5-day SMA is what it is; an average of the last 5 closes. It is only important to know that what is being left behind by the average is equally weighted with what is being added as the data moves forward.

Make sense?



- Craig
Here to Help!
bustermu
Posted : Tuesday, October 11, 2005 10:46:17 AM
Registered User
Joined: 1/1/2005
Posts: 2,645
Craig makes a good case for not using an SMA as a tracking filter.

Craig's statement:

"For the SMA value of 69.30 to stay the same or drop the stock would need to close at 50.00 or less."

has the counterpart:

"For the EMA value of 69.30 to stay the same or drop the stock would need to close at 69.30 or less."

An EMA always moves toward the new data value and never goes beyond it. The price you pay for that attribute is Lag, which is the same as for the SMA of the same period.

Thanks,
Jim Murphy

wizardry
Posted : Thursday, April 20, 2006 11:06:07 PM
Registered User
Joined: 1/23/2006
Posts: 2
Hello:
Would like to double check:
What is the meaning of AVGC30? Is this the 30-day SIMPLE average of the closing prices for the past 30 days? Thank you.
Craig_S
Posted : Friday, April 21, 2006 8:11:01 AM


Worden Trainer

Joined: 10/1/2004
Posts: 18,819
AVGC30 takes the last 30 closes in price and averages them together. This is the same as a 30-day simple moving average of price.

- Craig
Here to Help!
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