| Moving averages are used very extensively by | | | | period to use? The common periods are 9, 14, 21 and |
| trading professionals in stock and commodity | | | | 50, but there are many opinions about this and |
| markets. The importance of the moving average can | | | | individual investors may have their own timeframe |
| often be misunderstood. Many traders and market | | | | they use that works best for their system. |
| makers use moving averages to determine support | | | | So, how do you determine what number of periods |
| and resistance points as well as changes in the | | | | to use? One way is to choose an average that |
| direction of a market or stock. | | | | provides support to reactions, especially for the first |
| First, lets back up a bit and define what a moving | | | | reaction after a trend change. |
| average is. A moving average is the average price of | | | | For example, say a market maks a low, then rallies |
| a stock or commodity for a pre-defined number of | | | | for 10 days, then pulls back for 5 days before turning |
| periods that changes, or moves, when a new period | | | | higher and taking out the high of the first 10 rally, |
| is added and the oldest period is dropped. For | | | | thereby confirming the birth of a new uptrend. The |
| example, if you are using a 14 day moving average | | | | correct average would be the one that offers |
| you would add up the closing prices for the last 14 | | | | support at the 5 day low. An average that is too |
| days and divide that number by 14. On the 15th day | | | | long would be slow to react and would not provide |
| you drop the oldest day and add up the last 14 days | | | | support at the 5 day low, thereby missing the |
| and divide by 14 again. Now you have two data | | | | change in trend. An average that is too short would |
| points. This continues everyday. Fortunately today | | | | find the price crossing it two or more times and not |
| we have computers that do all the hard work for us, | | | | useful in providing support trend information. |
| all we have to do is tell it how many periods we | | | | It is important also, to use short, medium and long |
| want to use and it's done in an instant. | | | | term moving averages in your charts to help define |
| A period can be defined in days, weeks and months. | | | | support and resistance areas and changes in trend |
| It can also take the form of minutes if you are day | | | | for different time periods. |
| trading. So the question becomes, what is the best | | | | |