Wednesday, November 22, 2006

How I Use Moving Averages



Today I'd like to talk about how I use moving averages. There is no right or wrong way, this is just my way..Most people have their favorite number for an average...some like the 20 bar average, others favor the 10, 50, 100, 200 etc..Rather than me pick what average I like, I'll let the market tell me which average to use..What I mean by that is this..Each and every market has it's own personality based on the traders that trade that particular market.. Every market will behave differently and that is expressed in terms of volatility, seasonality, price patterns and volume.. With that in mind you CANNOT apply one average to all markets and expect that to work well.. What I do is I try to find an average that supports the pullbacks in a particular stock.. Once that average is found, I'll continue to use that average to help me determine when the trend has changed..
In the above example we see a weekly chart of the SPX...Notice how all of the pullbacks were supported by the 70 week moving average..This 70 week average could have been known as early as November 2004! Since then we had 3 major selloffs which were all supported by this same average... The long term weekly trend in the SPX will remain up until the 70 week average is broken and the slope of the average turns down.. I hope this helps....

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