Chapter summary

⇒ Moving averages allow you to distinguish objectively between price ripples and underlying trends.

⇒ Moving averages eliminate the subjectivity that’s inevitable with the visual or ‘eye’ method to identify trends or patterns and changes in trend.

⇒ A moving average is a lagging indicator as there’s a time delay between a price trend change and the moving average trend change. This disadvantage is offset by the advantage that a moving average is a more reliable trend change indicator than price alone.

⇒ There are three main types of moving average used in charting: simple moving average (SMA), exponential moving average (EMA) and weighted moving average (WMA).

⇒ The SMA is the average closing price over a number of days with each price given equal weight, whereas EMAs and WMAs give more weight to recent prices and less to earlier prices. Therefore they’re more sensitive to trend changes and they detect them earlier than the SMA.