THE HAnDbook of TEcHnIcAl AnAlySIS(8) for gauging the Strength of trend
The strength of a trend may be gauged from:■ (^) The degree of divergence between moving averages
■ (^) The degree of divergence between price and a moving average
■ (^) The angle of ascent or descent of the moving average
(9) for gauging underpriced and overpriced Markets
One way moving averages can help gauge whether it is advantageous to buy into
a stock is to determine whether is it relatively underpriced or overpriced. This
may be done via the use of volume-weighted moving averages, or VWMA. If
prices are below the VWMA, then it is considered an advantageous buy, whereas
if prices are above VWMA, then it would be more advantageous to sell. The
current trend may also be determined from the direction of the VWMA. See
Figures 11.15 and 11.16.
11.3 Chapter Summary
As we have seen, moving averages are extremely useful when used as a filter for
determining trend characteristics in the markets. A moving average may be tuned
to identify short, medium, and longer-term trends, as well as gauge the strength of
any such trend. Moving averages also form the basis for creating price envelopes
and bands. Many practitioners employ moving averages as a means of signaling
entries into the market.figure 11.36 Moving Averages Rebounding Off Other Moving Averages.