V.6:3 (90-92): Moving averages made simple by Heidi Schmidt

V.6:3 (90-92): Moving averages made simple by Heidi Schmidt
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Moving averages made simple by Heidi Schmidt

Once a beginning chartist successfully learns trend identification and channel drawing (Stocks & Commodities, January 1988), moving averages are often the next technical tool to master. Moving averages may be used on price or yield to generate a simple trading system or to confirm an opinion from the charts. Moving averages "smooth" the data, allowing trends to be more easily seen and provide a benchmark by which to judge if a reversal has begun.

Simple and exponential moving averages are the most popular types used by technicians. A moving average assigns to each date a number that is an average of previous prices plus the current price. It "moves" by incorporating each new price into this average and either deleting the oldest price (simple moving average) or reassigning the weights attached to the previous prices (exponential moving average).

Simple moving average

A simple moving average is the arithmetic mean or average of X price points (where X is the periodicity variable). Figure 1 lists the closing September bond futures price for August 1987 and the three-period moving average on the close. The calculation is simple. For example, the three-period moving average for August 10, 1987 (with bond prices converted from 32nds to decimals) is:

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