Types of Moving Averages:
- Exponential Moving Average
- Simple Moving Average
Exponential Moving Average:
In order to decrease the holdup in simple moving averages technically use exponential moving averages and exponentially weighted moving averages.
Exponentially moving averages reduce the lag by applying more weight to recent prices relative to older prices. It reacts quicker to recent price ranges than the simple moving averages.
Simple Moving Averages:
The simple moving average obviously has a lag, but the exponentially moving average may br prone to quicker breaks.
With this, investors and traders should first identify securities that display some trending characteristics before attempting to analyze with the moving averages.
If price movements are variable and unpredictable over the protracted historical of time, then a moving average is probably not the best choice for analysis.
Two Moving Average System:
An alternative approach to using filters to use a fast moving average to represent the price line. The fast moving average used is normally 5 days and the slow moving average in selected according to the length of the cycle being traded. The system still has the same weakness as the single moving average system: unpredictable trades are signaled during ranging markets.
Trading signals from Two Moving Average System:
Signals are generated when the moving average cross:
- Go long when the fast moving average crosses the slow MA (Moving average) from below.
- Go short when the fast MA crosses the slow MA from the above.
- In case of two moving average system, lookout for short term averages crossovers.
- Always check Weekly and Monthly charts first, the bigger price and to determine, whether the spurt in prices, and the moving average crossover signal is mere a pull back, or resumption of uptrend in broader way.
- When longer term moving averages give a buy signal. It indicates a long term bullish move being established. Use shorter and longer day moving averages on monthly, weekly and daily charts based on the time frame. Establish the trend based on it and then take the position in the direction of the trend.
Three Moving Average System:
The three moving average system attempts to identify the ranging markets. They tend to, be unprofitable when traded with trend indicators.
Trading Signals from Three Moving Average System-
- The three moving averages are fast, middle and slow.
- Entry points are determined by the middle moving average crossing the long MA and exit points by the fast MA crossing the middle MA.
- Go long When – middle moving average crosses to above slow MA from below; and fast MA is above middle MA.
- Close long when – fast moving average crosses to below middle MA from above.
- Go short when – middle moving average crosses to below MA from above; and fast MA is below middle MA.
- Close short when – fast moving average crosses to above middle MA from below.