It's been around forever, and it's a tried-and-true favorite. It's also the source of great frustration. How can anything end up as both? Here are the basics for using moving averages to identify the trend in the market.
No technique is more frequently
used ó or more maligned ó than
moving averages of prices. Itís
used frequently because itís the
embodiment of a fundamental
trading rule: Go with, not against,
changing prices. Averages canít
help themselves; they always go
in the proper direction, not sooner
but later. Hence, the malignment:
Since averagesí movement lags› price action, their indica-tions
for trading will be late and perhaps, therefore, unprof-itable.
How to make the most of these artificial constructs?
First off, in contrast to, say, trendlines, it is important to
recognize that averages are a mathematical construct. There-fore,
they will be computed with robotic catatonia, no matter
what the current hysteria. While trendlines, arcs and circles
are usually personal visual constructs, it is their mathematical
abstraction that gives indicators their attraction and validity.
Though an indicator can be thrown by data quirks that a
human might ó might! ó ignore, the good side to this
unquestioning use of data is that the indicator ignores noth-ing,
an error that humans, prone to ignoring bad news anyway,