| Using Moving Averages as Trend Filters |
| Written by Gabe Velazquez |
| Monday, 16 February 2009 00:00 |
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First, I am going to assume that most readers have a basic understanding of moving averages. Even so, understanding the differences between an exponential moving average and a simple moving average is an area I find many people are unclear about. So with that in mind, let me begin with a brief explanation of how a simple moving average is drawn. In the days before computers, technicians simply added the closing prices for a given period (let's say 10 days) and divide that number by 10. In this example, we would require at least 10 days of data to begin plotting this particular moving average. To continue plotting the line, we would add days 2 through 11 and so on. If price rises, then the slope of the line would follow suit, indicating an uptrend.With the advent of computers, technical analysts went to work enhancing this old classic moving average. In an effort to reduce the lag associated with the simple moving average, they began using a different calculation that placed more weighting on the most recent prices when compared to older prices. The result was the creation of the exponential moving average. In the chart labeled Figure 1, I have applied both a 50-day simple moving average and exponential moving average to the daily TF (E-mini Russell 2K). Note that the distance between actual prices is far less for the exponential moving average than it is for its slower counterpart. This is an excerpt from Mar 2009 issue of Trader's Journal. To view the complete article, please click here.
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