A Guide to Technical Indicators – Moving Averages

August 31st, 2015 by VantagePoint Software

technical indicators

Newbie traders and even seasoned investors with a fundamental bias often become overwhelmed by the technicals. But before you develop “analysis paralysis” it’s important to remember that most technical indicators are neither too complex nor too sophisticated for the average retail trader to use.  Watch this short video for an overview of the indicators available in VantagePoint.

Market Analysis Tools – What is an Indicator?

Let’s begin by clarifying what an indicator is and is not. It is a calculation plotted on or below price action on a chart. This provides an alternate view for interpreting market moves, a view that might not be as obvious when looking at price movement alone. Indicators are used in two main ways: to confirm price movement and the quality of chart patterns, and to form buy and sell signals.  An indicator does not involve random estimations or judgments.
What is a Moving Average – Chart Analysis Basics 

Moving averages (MAs) are one of the most popular and widely used technical indicators. Moving averages smooth the price data to form a trend following indicator. They do not predict price direction, but rather define the current direction with a lag. Moving averages lag because they are based on past prices. Despite this lag, moving averages help smooth price action and filter out the noise. They also form the building blocks for many other technical indicators and overlays, such as Bollinger Bands and the MACD.

The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). These moving averages can be used to identify the direction of the trend or define potential support and resistance levels. 

Simple Moving Averages

A SMA is figured using the closing prices for a specified period, such as 6 days.  If prices are closing lower, the SMA points down. If prices are closing higher, the SMA points up. Plotting this average on a chart could make it much easier to identify market direction and spot trends, compared to a chart that just shows the open, high, low and close of the price chart’s time frame. 

You don’t need complex math to compute a SMA. Actually, they are very simple to figure. Let’s say one is trying to calculate the 6-day moving average of closing prices. Add up the last 6 days and divide the total by 6 to determine the moving average.

The average “moves” because every day the oldest day is dropped off as the current day’s information is added.

Simple Moving Average

While the math is seemingly simple, this technical tool is widely available in all standard charting software packages. There will usually be a function to change the parameter of periods, such as a 20-day or 10-hour (depending on chart time frame) for the moving average.

Limitations of a Simple Moving Average

A criticism to the SMA concept is that each day’s action carries equal weight. In addition, because of the way it is constructed, the SMA trading signals are lagging, not leading, indicators. That means they are only using past data and have no predictive value as to what may happen in the future.
Because of this lagging effect and the desire for traders to have a leading indicator, VantagePoint’s team spent years researching and millions of dollars to create a Predicted Moving Average (PMA).

A 6-day PMA of closing prices takes the past four days of closes, adds two days of predicted data, and then divides that total by six.

predicted moving average

Six days are still averaged, but day five and day six are predicted. This minimizes, if not totally eliminates, the lag.

Exponential Moving Averages

Exponential moving averages (EMAs) are similar to SMAs except that more weight is given to the latest data. The weighting applied to the most recent price depends on the number of periods in the moving average. There are three steps to calculating an exponential moving average. First, calculate the simple moving average. An exponential moving average (EMA) has to start somewhere so a simple moving average is used as the previous period’s EMA in the first calculation. Second, calculate the weighting multiplier. Third, calculate the exponential moving average.

The formula below is for a 10-day EMA

SMA: 10 period sum / 10

Multiplier: (2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0.1818 (18.18%)

EMA: {Close – EMA(previous day)} x multiplier + EMA(previous day).

A 10-period exponential moving average applies an 18.18% weighting to the most recent price. A 10-period EMA can also be called an 18.18% EMA. A 20-period EMA applies a 9.52% weighing to the most recent price (2/(20+1) = .0952). Notice that the weighting for the shorter time period is more than the weighting for the longer time period. In fact, the weighting drops by half every time the moving average period doubles.

Still, even with the weighting of the EMA, it is still a lagging indicator. Only technical tools like VantagePoint Trading Software’s PMA are leading indicators that predict market behavior.

Moving averages can be a useful tool for those looking to identify what type of trend the market is in and when a turning point has occurred.

Again, traders will never catch exact tops or bottoms with moving averages, as they are lagging indicators. However, an indicator like VantagePoint’s Predicted Moving Average can take your technical analysis to a whole different level and literally put you days ahead of other traders.

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5 Things Every Trader Needs to Know About Trend Forecasting

April 7th, 2015 by VantagePoint Software

Trend Forecasting for Traders

Trend followers in fashion can be fickle and flighty. It is tough to predict the whims of the fashionistas as to what the “hot colors” or who the “in designers” will be for next spring.

And while it is also tough to know where IBM or AAPL stock will be trading a year from now, there are some basic truisms that trend forecasters can use that apply to all markets.

Here are five basic concepts about trend forecasting that can help set you up to be potentially profitable in the markets.

  1. All Trends are NOT Created Equal – Stock Chart Patterns

If you are looking at a stock chart, examining the price movement over 30 minutes versus 30 days will yield dramatically different results. First and foremost, you need to understand what time period you are considering.

Trends can be classified as primary (long), intermediate and short term. However, markets exist in several time frames simultaneously. As such, there can be conflicting trends within a particular stock depending on the time frame being considered. It is not out of the ordinary for a stock to be in a primary uptrend while being mired in intermediate and short-term downtrends. This also applies to almost any asset class including commodities and ETFs.

Typically, beginning or novice traders lock in on a specific time frame, ignoring the more powerful primary trend. Alternately, traders may be trading the primary trend but underestimating the importance of refining their entries in an ideal short-term time frame.

A general rule is that the longer the time frame, the more reliable the signals being given. Once the underlying trend is defined, traders can use their preferred time frame to define the intermediate trend and a faster time frame to define the short-term trend.

But that doesn’t mean that each trend should be viewed in isolation. Taking a holistic approach to trend analysis can be very beneficial. Greg Firman, market analyst for TraderPlanet.com who spoke at the VantagePoint Power User Seminar in February, likened trend trading to automobiles. 

  1. There are Two Main Types of Trend Trading – Following and Fading

A trend-following strategy is one used to identify entries in trending markets. The goal of a trend-following strategy is to buy and close a position at a higher price in a bull market, and to sell and close a position at a lower price in a bear market. The most simplistic definition of a bull market is a price pattern of higher highs and higher lows. The most simplistic definition of a bear market is a pattern of lower lows and lower highs.

But according to Firman, markets trend only 20 percent of the time. Therefore, trend following strategies are not always applicable.

A trend-fading strategy is one that is used in sideways or choppy markets. Trend-fading strategies identify opportunities to sell highs and buy lows (the opposite of a trend-following strategy). With trend-fading strategies, traders profit if a position is taken and the market moves back to an established range.

  1. Moving Averages – What Every Trader Needs in Their Trend Trading Toolbox

Moving averages (MAs) are among the most popular tools for trend followers and for good reason. The technique is very effective at identifying trends and enabling traders to maintain their positions until the trend is over. Moreover, by varying the lengths over which the MA is calculated, the sensitivity to smaller price changes can be adjusted to suit traders’ preferences. Shorter MAs involving a smaller number of days or weeks are more sensitive and provide quicker and more numerous signals than longer moving averages.

Traders like moving averages because they smooth out the peaks and valley in prices, are easy to use, and are easy to interpret. To learn more about moving averages watch our recent video here.

These are the positive qualities. The problem is that MAs are a lagging indicator. That is why in 1991, after years of research, VantagePoint’s team developed technology that forecast trends based on moving averages while retaining the positive qualities and reducing, or eliminating, the lag, which is the negative quality.

VantagePoint’s Predictive Moving Average (PMA) takes actual data and predicted data to forecast market trends.

  1. Support and Resistance – Where Market Trends Can End

So how can traders tell when a trend is coming to an end?

“Key support and resistance is the biggest teller – knowing where the buyers and sellers are,” said Firman.

Support and resistance are magnets that draw the market to them. As with any magnetic field, the closer the market gets, the stronger the magnetic pull, and the more likely it is that the market will reach the target. Also, as with a magnet, the market often accelerates when it gets close to the magnet. This momentum often results in either a breakout or continuation of the trend, or a trend reversal. Once the market reaches the target, the magnetism usually greatly decreases. It is as if the market turns off the magnet once it is reached.

If the market reverses or breaks out, it then moves to the next support below or resistance above. In a strong bull trend, resistance usually results in a pause because of profit taking or attempts to pick a top, but the trend then resumes up to the next resistance level. In a bear trend, the market usually falls through all support, although it often pauses at each level because of profit taking or attempts to pick a bottom.

All bull trends end at resistance and bear trends end at support, and if traders know how to read the changes in buying and selling pressure, transition can provide several trades in both directions.

  1. Trend Forecasting – Artificial Intelligence Can Improve Your Success

Many technical indicators, such as moving averages, attempt to filter out short-term price fluctuations so that the underlying trend can be observed. As mentioned earlier, trend traders rely on moving averages because they smooth out the movement in prices, are easy to calculate and understand, and depict the underlying trend.  However, a side effect of doing this is that the technical indicators like moving averages tend to lag behind the market and fail to spot the end of a trend.

Such technical indicators are referred to as lagging indicators. This lag effect typically causes the trader to respond late to market changes, resulting in lost profit opportunity and risk of increased losses.

VantagePoint’s research team has invented proprietary computer processes which address these limitations and overcome the lag effect through the development of methods, systems, and devices that combine both actual and predicted data derived from the application of neural networks to intermarket data found to be most influential on each specific primary market.

What that means for trend forecasting is that the artificial intelligence in VantagePoint gives traders a jump on the market. This is a priceless technological edge for traders looking to maximize the trend.

Take your trading to the next level with VantagePoint’s predicted moving averages that forecast trends ahead of the market. Request a free demo here.

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Trend Forecasting to Predict the Next Bubble Burst

April 2nd, 2015 by VantagePoint Software

bubble

The Dotcom bubble in the 1990s, the housing bubble and credit crisis in 2007-2009. Every trader wishes they could have known exactly when these bubbles were going to burst.

Going forward, what trading tools can help predict the next speculative boom and bust?

Bubble Basics

To clarify, an economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) is a “trade in high volumes at prices that are considerably at variance with intrinsic values.” It could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future.

Because it is often difficult to observe intrinsic values in real-life markets, bubbles are often conclusively identified only in retrospect, when a sudden drop in prices appears. Such a drop is known as a crash or a bubble burst.

Bubbles go up beyond all sense and come crashing down with violence. Bubbles are invisible to most while they inflate and are not obvious when they collapse. Everyone claims to have seen them after the fact.

Trading Technologies to Predict the Next Bust

So can traders get out before a market collapses? While trying to pick market tops is a fool’s game, there are ways to recognize significant trend changes. VantagePoint’s Predicted Moving Average (PMA) tool combines actual data and forecasted data to give traders a two-day jump on the market.

This can be a huge advantage when a bubble bursts and the markets have a precipitous decline. Think about the violent moves of the NASDAQ in the 1990s.

Don’t become the victim of the next bubble burst.

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