Moving Average

[Roberto]

Well asked! I was also wondering ... my working theory is that HrHs will turn out to be "higher highs" etc., but I still don't know what it means.

 

[dbphoenix]

dbphoenix

I should probably know the answer to the following and maybe I do but I don't recognise it the way it is stated.

What does the following mean ?

"relate what your MA is doing to the HrHs/Ls and LrHs/Ls that price is making (or not making), then you'll have a handy and useful little tool. Otherwise, you're just retarding your growth as a trader."

Regards

bracke

Relate what your moving average is doing to the higher highs or higher lows and lower highs or lower lows that price is making . . .

 

[bracke]

Relate what your moving average is doing to the higher highs or higher lows and lower highs or lower lows that price is making . . .

dbphoenix

Thank you for your reply

Roberto got it right but like him I do not understand how I am to relate the ma.

I will see the bar/candle chart with an ma on it but what am I looking for.?

Regards

bracke

 

[dbphoenix]

An uptrend is generally defined as higher highs and higher lows. A downtrend is generally defined as lower highs and lower lows. However, if one is unfamiliar with price action, he may see "higher highs" where they exist only by virtue of a tick. If one is trading ticks, this may not matter. But most people don't.

One can therefore apply a tight MA which tracks the trendline that one would draw but hasn't. If one thinks that price is making higher highs but the MA is just sitting there, then he must ask himself if there really is a trend, or if he sees something that really isn't there.

I can't think of any other use for MAs other than the scanning I mentioned.

 

[bracke]

An uptrend is generally defined as higher highs and higher lows. A downtrend is generally defined as lower highs and lower lows. However, if one is unfamiliar with price action, he may see "higher highs" where they exist only by virtue of a tick. If one is trading ticks, this may not matter. But most people don't.

One can therefore apply a tight MA which tracks the trendline that one would draw but hasn't. If one thinks that price is making higher highs but the MA is just sitting there, then he must ask himself if there really is a trend, or if he sees something that really isn't there.

I can't think of any other use for MAs other than the scanning I mentioned.

dbphoenix

I have read your reply through several times and I understand the first paragraph.
I am a little lost on the second paragraph. One would think that the price was making higher highs if indeed it did ie. the price rises to a higher high
If the price rises the ma also rises as it simply reflects the price. So how can the ma sit there if the price is moving surely it must follow suit.

Regards

bracke

 

[Roberto]

I think I'm beginning to understand a little: are you saying that you're using a very tight MA as a sort of substitute for "price", in the sense that it smoothes out the minor fluctuations which might otherwise lead you to believe that something's happening when (in some sense) it isn't _really_ "happening"? Hope so, otherwise I still don't understand ...

 

[dbphoenix]

dbphoenix

I have read your reply through several times and I understand the first paragraph.
I am a little lost on the second paragraph. One would think that the price was making higher highs if indeed it did ie. the price rises to a higher high
If the price rises the ma also rises as it simply reflects the price. So how can the ma sit there if the price is moving surely it must follow suit.

Regards

bracke

An MA tells you where price is over a given time period. Price can fluctuate several ticks or more within that time period without affecting the MA for that time period at all. If an MA is flat, does that imply that the OHLC for each price bar must be the same?

 

[dbphoenix]

I think I'm beginning to understand a little: are you saying that you're using a very tight MA as a sort of substitute for "price", in the sense that it smoothes out the minor fluctuations which might otherwise lead you to believe that something's happening when (in some sense) it isn't _really_ "happening"? Hope so, otherwise I still don't understand ...

No, the MA is a substitute or proxy for the trendline, which is what an MA is, a moving trendline. If price really is "trending", the MA will move, often before one might think of drawing a trendline. If the MA doesn't, price isn't.

One of the most commonly-asked questions is "how do I avoid chop?" This is one of the simplest ways I know of.

 

[dbphoenix]

Incidentally, the MA people are going to get very upset about this stuff. So, as always, think for yourselves.

 

[JumpOff]

Here is the most useful thing I've found about a MA. When a trend reverses strongly, the MA only has a short moment in the horizontal position. Then it follows the price in the other direction. If you see price action that leads you to deduce that a reversal is in progress, but the MA stay flat for more than the usual amount of time, and the price does not lead it strongly in the other direction - then the volatility has dropped. At this point it's time to sit on your hands or go trade something else until the MA does something besides lay there. You can't make points when the MA is flat and the channel is narrow.

I've attached a chart for the EUR/USD forex this morning. The green lines highlight the area where the MA is flat.
JO

MX - After you browse and find the image you want to upload, you may need to scroll over to the right to see the upload button..

 

[TheBramble]

I think a useful way to 'get over' imagining an MA does anything other than provide a general indication of trend is to plot one in the mathematically correct fashion, which is one-half the sample period BACK in time.

Any tendency to 'see' the MA and current price action as in any way related rather disappears.

In JO's chart above - imagine shifting that SMA(14) back (i.e. left) 7 periods...

Of course, most avid TA users who use MAs would howl at the prospect of defiling their old friend in such a way and make many (most!) of their systems meaningless - but it does help break the habit of incorrectly attributing what has happened as having any direct relationship with what is about to happen.

 

[Roberto]

Many thanks for your replies. I'm really beginning to think (perhaps I should say "to realise") that price must be a good indication of price. (Socrates, I am nearly ready for you!)

 

[JumpOff]

Cool! Just followed my own advice. MA was flat, so I went and cleaned up some dishes in the kitchen. Came back and worked on some programming for a client. Noticed some price action on the EUR/USD - sure didn't need any stinking MA to see that rip snorting run start off. Just banked 40 pips.

My first successful (decent sized ) trade.... Now I'm off to see if I can snag some more....! Feeling a little giddy - I may just sit on the side until I'm calmer...
JO

 

[dbphoenix]

The green lines highlight the area where the MA is flat.
.

MAs are of course of little use with BO strategies, unless one wants to confirm that price leading up to the BO is in fact flat. Which is why the trader ought to create at least one set of tactics to take advantage of each of the three strategies: breakouts, retracements, reversals.

For example, the hinge break in the NQ this afternoon. One could say that the MA lagged badly, but only if one expected the MA to do something other than what it was supposed to do, which is to reflect trend, and since price wasn't trending, the MA did exactly what it was supposed to do, i.e., lie there. The decision to take or not take the BO had nothing to do with movement of the MA.

OTOH, like trendlines, MAs can be used easily to help define reversals and retracements and the differences between the two. However, in order to make the most of them, they should be as close to whatever TL one might draw if he weren't plotting MAs. This means fiddling with the settings until one finds something that plots an MA across the relevant swing points. If too many periods, it will be "late". If too few, it will be "early".

 

[trendie]

MAs are of course of little use with BO strategies, unless one wants to confirm that price leading up to the BO is in fact flat. Which is why the trader ought to create at least one set of tactics to take advantage of each of the three strategies: breakouts, retracements, reversals.

re: breakouts.
What I am experimrenting with is:
when the MA is either above or below the price bars, all fine and well - standard stuff, trends.

But when the MA line "strikes" the bar, I treat this as the beginning of a "range". The high and low of the price times 2 as the range. ( or use ATR as the range )
( you can exit the trend trade )

Then, when the MA breaks out of this "range", you consider the trend as having restarted.
This helps you avoid being whipsawed, as the whipsawing is happening in the range.

This way I can use MAs to trend, and also have a mechanism to call a range, and avoid whipsaws.
Too early to tell if it works.

 

[dbphoenix]

re: breakouts.
What I am experimrenting with is:
when the MA is either above or below the price bars, all fine and well - standard stuff, trends.

But when the MA line "strikes" the bar, I treat this as the beginning of a "range". The high and low of the price times 2 as the range. ( or use ATR as the range )
( you can exit the trend trade )

Then, when the MA breaks out of this "range", you consider the trend as having restarted.
This helps you avoid being whipsawed, as the whipsawing is happening in the range.

This way I can use MAs to trend, and also have a mechanism to call a range, and avoid whipsaws.
Too early to tell if it works.

Actually, the MA doesn't "strike" anything. It's just doing what it does, minding its own business. If anything is guilty of striking something, it's price, since the MA can't move without it.

But as for when trends begin and end and using trendlines or MAs for entry and exit, you ought to bone up on reaction highs and lows and how trend, trend direction, trend strength, and trend reversal are defined.