Stocks & Commodities V. 23:2 (22-27): Visiting MOMA by Stephan Bisse
Give your moving averages a head start with move-adjusted moving averages.
The most popular of all technical indicators may be the moving average. The backbone of many trading systems, moving averages are great for filtering out the noise from time series and showing the underlying trend of where the time series has been.
By definition, however, moving averages on their own can never say anything about the future direction of a time series, regardless of the lookback period used or any standard adjustments or weightings applied to the datapoints. The only way that moving averages can give any indication of the coming direction of a time series is if additional information with some predictive power — in other words, a leading indicator for the time series in question — is incorporated into the calculation.
TYPES OF MOVING AVERAGES
A simple moving average (SMA) is calculated by taking the sum of a series of datapoints and dividing it by the number of points in the series. Each subsequent value of the SMA is calculated by including the new datapoint in the calculation and dropping the oldest to keep the number of datapoints in the calculation constant. In an SMA, all the datapoints are given equal weight.