Chapter 14. Moving Averages

Chapter Objectives

By the end of this chapter, you should Be aware of how moving averages are used to identify trends Be able to calculate a simple moving average Be able to calculate an exponential moving average Be familiar with the concept of directional movement Be familiar with the construction of envelopes, bands, and price channels

One of the most successful methods of identifying and profiting from trends is the use of moving averages. A moving average is a constant period average, usually of prices, that is calculated for each successive chart period interval. The result, when plotted on a price chart, shows a smooth line representing the successive, average prices. Moving averages dampen the effects of short-term oscillations. Many of the most successful technical investment managers use moving averages to determine when trends are changing direction. Moving averages are especially useful in markets that have a tendency to trend.