| I have designed over a dozen analytical stock market | | | | same. The difficult part is interpreting what the |
| software systems for other customers. These | | | | averages tell you about the stock's performance. |
| individuals generally come from a strong trading | | | | Essentially the question is always: Does a short term |
| background and most often were senior analysts or | | | | average cross over a long term line signal a new |
| advisors at a major financial firm. These people have | | | | break out for the stock or will the short term trend |
| often spent their lifetime studying the markets as | | | | fall back in line with the longer term trend? It's not |
| well as analytical systems and theories concerning | | | | fool proof, you still have to make your own |
| market trends. In almost all cases the systems these | | | | assessments, but the indicator can help you. |
| individuals want to build is based on the moving | | | | Traditionally most analysis of short term versus long |
| average. Time and again I have seen people test | | | | term averages considers crosses, where the short |
| theory after theory only to return to using moving | | | | term average line crosses over the long term line to |
| averages as their primary analytical tool. | | | | most often indicate a new future trend of a stock. In |
| The moving average is not as glamorous as many of | | | | other words, meaning that the longer term average |
| the new indicators and specialized indices that | | | | will follow the direction of the shorter term moving |
| mathematicians around the globe are clamoring to | | | | average. In reality however this is not always the |
| create however the moving average you can be | | | | case. Often short term averages will cross the long |
| sure is still one of the most important indicators you | | | | term average only to fall back into line with the long |
| can use. After all, isn't past performance the best | | | | term trend. Only you can determine which average |
| indicator of future success? | | | | indicates the true direction the stock price will take. |
| Before we delve too far into an argument supporting | | | | At this point, often supporting information such as |
| the use of the moving average a bit of discussion | | | | news or quarterly financial releases are used to assist |
| regarding a description of how the indicator works is | | | | in determining if the short term moving average |
| necessary. A moving average is simply that, an | | | | trend is merely a market driven change or if it |
| average of the price of a stock over a set period of | | | | reflects a basis for the increased value of the |
| time. The benefit of using an average of the prices | | | | company. |
| rather than the actual prices is the smoothing factor | | | | There are some analysts that not only focus on |
| the average calculation incorporates into the result. | | | | short term versus long term crosses of the moving |
| By averaging the prices the impression of unusual | | | | average but that also take the "steepness" of the |
| price spikes or sudden drops are diminished and what | | | | cross into consideration. Steep or sharp dramatic |
| emerges is a more stable or less volatile trend of a | | | | crosses in this case are often seen as being strong |
| stock price's history. | | | | market direction indicators signaling a future change in |
| The smoothing benefit of the average has more of | | | | the price trend. If you test this with a real chart at |
| an impact over longer periods of time as should be | | | | stockrageous and select the short term 20 over the |
| expected. The more data points that are averaged | | | | long term 200 average which is the traditional |
| then the greater the weight of the most common | | | | standard for short versus long term average cross |
| price trends. So longer period averages a popular one | | | | analysis in a five year chart you will note the impact |
| being 200 days for instance tend to result in much | | | | of steep crosses in almost any stock. |
| smoother lines than shorter averages. In a sense the | | | | There are some issues with moving averages; most |
| longer term averages can be seen as representing a | | | | often critics cite the lack of sensitivity to the range |
| company's long term potential, based on their | | | | of the markets because the average ignores the |
| historical performance and short term averages their | | | | open, high and the low of each interval. This is |
| daily or weekly trends. | | | | especially evident in more volatile stocks which can |
| The study of comparing short term moving averages | | | | be difficult to assess when neglecting the volatility of |
| against long term moving averages is probably the | | | | the instrument. Other factors such as breaking news |
| most common approach to using the moving average | | | | also cannot be accounted for in any technical analysis. |
| indicator. In fact one of the most popular traditional | | | | However the effectiveness of the moving average |
| indicators the MACD (Moving Average Convergence | | | | as an indicator is apparent by its sheer sustainability, |
| Divergence) is based on comparisons of short term | | | | it was one of the earliest methods of analysis and |
| versus long term moving averages. There are some | | | | remains as a key indicator for stock analysts around |
| distinctions between the calculation of the MACD and | | | | the globe. Is past performance the best indicator of |
| comparing short term versus long term moving | | | | future success? You decide! |
| averages however the principle is essentially the | | | | |