Moving Averages
that is, a simple moving average. A continuous type moving average is one where
the most recent value is the result of contributions by all data points since its incep-
tion. There is no dropping off of older data, that is, an exponential moving average.
Moving averages are also constructed by creating a rolling average of more
complex combinations of technical data such as:■ (^) Mid-Price: (H + L)/2
■ (^) Typical Price: (H + L + C)/3
■ (^) Weighted Close: (H + L + 2C)/4
■ (^) Data Differences:
■ (^) Bar Range (H - L)
■ (^) Momentum (Cn - Cn- 1 )
■ (^) Detrended Data (e.g., MACD) [Closing price of MA(1)—Closing price of
MA(2)]
■ (^) Net Advance Declines (A – D)
■ (^) Net Advance Volume (UV – DV)
■ (^) Net New Highs (New H - New L)
■ (^) Intercontract Spread (Front Month – Back Month Price)
■ (^) Data Ratios:
■ (^) Rate of Change, that is, Momentum [(Cn - Cn- 1 )/Cn- 1 ]
■ (^) Advance Decline Ratio (A/D)
■ (^) Volume Ratio (UV/DV)
■ (^) Ratio Adjusted AD [(A – D)/Total Issues]
■ (^) Moving Averages: SMA, EMA, WMA, VWMA (i.e., Double and Triple
Smoothing)
■ (^) Oscillator Equations: Stochastic Raw %K
(2) Longitudinal and Cross-Sectional forms
of averaging
As seen from the lists above, a moving average may be constructed on practically
any simple or complex combination of technical data. Generally, a moving average is
constructed using single-valued data. This is referred to as the longitudinal form of a
moving average. It tracks the current average value for each new single value added
to the moving average. Most forms of moving averages are of the longitudinal type.
If we construct a moving average based double or multiple values for each
period, this is referred to as the cross-sectional form of a moving average. For ex-
ample, constructing a new moving average based on the average value of two other
moving averages would represent a cross-sectional form of a moving average.
(3) Data referencing
The average price over N bars is positioned on the time line in the middle of the
sequence of N bars, which represents the correct position for average price within
the sequence. This is referred to as a centered moving average. This form of mov-
ing average displays no lag with respect to price. As a consequence, it is a popular
tool for identifying price cycles.