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Indian Shares - MACD Indicator
Any student of Technical Analysis will have learned about Moving
Averages in the early stages of their study. Just because the concept
has been around for a long time doesn't mean that it has lost value, in
fact it is one of the most useful indicators available for Indian
investors. In this article there is also mention of the MACD which is
derived from moving averages.
Moving Average - The Old Standby of Technical Analysis is Not Dead. Yet
By: Dean Schuiteman
I have designed over a dozen analytical stock market software systems
for other customers. These individuals generally come from a strong
trading background and most often were senior analysts or advisors at a
major financial firm. These people have often spent their lifetime
studying the markets as well as analytical systems and theories
concerning market trends. In almost all cases the systems these
individuals want to build is based on the moving average. Time and again
I have seen people test theory after theory only to return to using
moving averages as their primary analytical tool.
The moving average is not as glamorous as many of the new indicators and
specialized indices that mathematicians around the globe are clamouring
to create however the moving average you can be sure is still one of the
most important indicators you can use. After all, isn’t past performance
the best indicator of future success?
Before we delve too far into an argument supporting the use of the
moving average a bit of discussion regarding a description of how the
indicator works is necessary. A moving average is simply that, an
average of the price of a stock over a set period of time. The benefit
of using an average of the prices rather than the actual prices is the
smoothing factor the average calculation incorporates into the result.
By averaging the prices the impression of unusual price spikes or sudden
drops are diminished and what emerges is a more stable or less volatile
trend of a stock price’s history.
The smoothing benefit of the average has more of an impact over longer
periods of time as should be expected. The more data points that are
averaged then the greater the weight of the most common price trends. So
longer period averages a popular one being 200 days for instance tend to
result in much smoother lines than shorter averages. In a sense the
longer term averages can be seen as representing a company’s long term
potential, based on their historical performance and short term averages
their daily or weekly trends.
The study of comparing short term moving averages against long term
moving averages is probably the most common approach to using the moving
average indicator. In fact one of the most popular traditional
indicators the MACD (Moving Average Convergence/Divergence) is based on
comparisons of short term versus long term moving averages. There are
some distinctions between the calculation of the MACD and comparing
short term versus long term moving averages however the principle is
essentially the same. The difficult part is interpreting what the
averages tell you about the stock’s performance. Essentially the
question is always: Does a short term average cross over a long term
line signal a new break out for the stock or will the short term trend
fall back in line with the longer term trend? It’s not fool proof, you
still have to make your own assessments, but the indicator can help you.
Traditionally most analysis of short term versus long term averages
considers crosses, where the short term average line crosses over the
long term line to most often indicate a new future trend of a stock. In
other words, meaning that the longer term average will follow the
direction of the shorter term moving average. In reality however this is
not always the case. Often short term averages will cross the long term
average only to fall back into line with the long term trend. Only you
can determine which average indicates the true direction the stock price
will take. At this point, often supporting information such as news or
quarterly financial releases are used to assist in determining if the
short term moving average trend is merely a market driven change or if
it reflects a basis for the increased value of the company.
There are some analysts that not only focus on short term versus long
term crosses of the moving average but that also take the “steepness” of
the cross into consideration. Steep or sharp dramatic crosses in this
case are often seen as being strong market direction indicators
signalling a future change in the price trend. If you test this with a
real chart at Stock Rageous and select the short term 20 over the long
term 200 average which is the traditional standard for short versus long
term average cross analysis in a five year chart you will note the
impact of steep crosses in almost any stock.
There are some issues with moving averages; most often critics cite the
lack of sensitivity to the range of the markets because the average
ignores the open, high and the low of each interval. This is especially
evident in more volatile stocks which can be difficult to assess when
neglecting the volatility of the instrument. Other factors such as
breaking news also cannot be accounted for in any technical analysis.
However the effectiveness of the moving average as an indicator is
apparent by its sheer sustainability, it was one of the earliest methods
of analysis and remains as a key indicator for stock analysts around the
globe. Is past performance the best indicator of future success? You
decide!
Stock Rageous is a financial tools service brought to you by
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Article Source:
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The Indian stock market is possibly the world's best investment and will
be for many years to come , this article is one of many which may assist
your trading. SharesDaily.in does not necessarily endorse the contents
of this article.
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