Moving Average is generally used to identify or confirm a trend, and works best in trending markets. It will not signal you that a trend change is imminent, but it will help you to determine if an existing trend is still in motion and help you to confirm when a trend reversal has taken place.
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Formula
MovSt = (Xt + Xt-1 +...+ Xt-n+1) / n
n = The number of selected periods
Xn = Price paid for the 'n'th interval
In a Simple Moving Average, the mathematical median of the underlying instrument is calculated over the observation period. Prices (mainly closing prices) over this period are added and then divided by the total number of time periods. Every day of the observation period is thus given the same weighting.
The length of time – the number of bars – calculated in a Moving Average are of significance in using a Moving Average that gives you the trading signals the investor wants. Fast Moving Averages with short time periods normally fluctuate and are liable to give more signals, especially in futures markets. Slower Moving Averages are the ones that use longer time periods, displaying a smoother Moving Average. The slow averages, however, may be too slow to enable you to establish a long or short position with profit. Generally, short time periods are used to analyze trends in the futures markets, although many analysts use a 200 length Moving Average when tracking trends in equities. It is advisable to test different time periods in order to have realistic signals when analyzing a market.
Properties
Input Field: The Symbol field on which the study will be calculated. Input Field is set to "Default", which, when viewing a chart for a specific symbol, is the same as "Close".
Period: The number of bars in a chart. If the chart displays daily data, then period denotes days; in weekly charts, the period will stand for weeks, and so on. The application uses a default of 9.
Interpretation
Moving Averages are one of the most commonly used technical tools. They follow the trend, smooth the normal fluctuations of the data, and clearly signal long and short positions to the investor.
A Moving Average may be displayed as a normal crossover trading system when you select up to three different averages. Most investors and charting services use three moving averages. Their lengths typically consist of short, intermediate, and long-term. A commonly used system is 4, 9, and 18 intervals. An interval may be ticks, minutes, days, weeks, or even months; it depends upon the chart type.
The normal moving average crossover buy/sell signals are as follows:
A buy signal is flashed when the short and intermediate term averages cross from below to above the longer term average.
Conversely, a sell signal is issued when the short and intermediate term averages cross from above to below the longer term average.
You can use the crossover approach with only two moving averages, but market technicians suggest longer term averages (a longer interval) when trading only two moving averages in a crossover system.