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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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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