ChAPter 11 Moving Averages
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moving average is an incredibly versatile technical tool. It can help to deter-
mine the general direction and strength of an existing trend, potential levels of
support and resistance, and points of entry and exit and can be used as the central
value for envelopes and bands, which are used to pinpoint levels of overextension
in the market. In this chapter, we shall cover the main components of moving
averages, their various forms of construction, and applications in the markets.11.1 Seven Main Components of Moving Averages
Moving averages have a multitude of applications, some of which are:■ (^) As a price filter, allowing for better clarity with regard to price activity
■ (^) In oscillator form for identifying potential levels of overselling and overbuying
■ (^) As a price barrier, providing support and resistance to price
■ (^) As a central value for envelopes and bands
■ (^) To indicate the strength and direction of a trend
■ (^) As a trigger for initiating entries and exits
■ (^) As a signal of potential bullishness and bearishness in the market
L e a rNiNg ob j eCt iVeS
After studying this chapter, you should be able to:
■ Understand the importance of moving averages as a technical tool for forecasting
price reversal as well as determining the strength and direction of a trend
■ Apply the concepts of moving averages to the real markets
■ Identify and differentiate between detrending and smoothing
■ Differentiate between reliable and unreliable entries based on moving averages
■ Identify early signs of a market top or bottom using moving averages
■ Understand how to calculate EMA, SMA, WMA, and VWAP