On Moving Averages

The market closed 1% higher after a gain of 31.00 points after a higher gain at the beginning of the day. Gainer beat losers 348:260. An analysis of the 3-month chart gives very near-term promise of a short ride upwards if tomorrow ends finishes in a 3rd white knight.

Today's topic is on Moving Averages. These values are obtained by taking the average prices of the past days. A more detailed definition and explanation is given here.

I shall provide the value-add by sharing my knowledge about Moving Averages. When reading charts, some traders chose to use Fibonacci numbers as they represent sacred geometry. Fibonacci numbers that can typically be used are: 5, 8, 13, 21, 34, 55, 84 depending on your investment horizon. Notice that 5 days = 5 trading days and not 5 calendar days. Hence, 5 trading days cover a week.

It is useful to compare a shorter term with a longer term. My choice, from when I learnt this is to use MA8 and MA55. The former in measures slightly more than a calendar week and the other, close to 3 calendar months. The rule-of-thumb here is to BUY at an intersection of MA8 and MA55. However, in my opinion, it matters what direction the lines are heading too. Below is a summary of the characteristics.

	MA8	MA55	BUY?
Direction	Up	Up	Yes
	Down	Up	Yes
	Down	Up	No
	Down	Down	No

The reason for this is that if MA55 is heading down, the general trend tends to be a bit bearish. So in order to cut risk, prudence has to be exercised before a BUY. Conversely, In a bullish market, even though general optimism is there, prudence is also to be exercised to reduce the chance of irrational actions.

Moving Averages is possibly the simplest technique in technical analysis. It is beneficial take them into consideration when investing.