Moving Average Method
The Moving Average Method is a statistical analysis tool used to determine trend continuity in financial data. By examining price changes over a selected period of time and plotting the moving average of the data in sequence, investors and analysts can better identify and predict future market behaviour. When using the Moving Average Method, most traders will review a series of data points, ranging from five to 200. When using the Moving Average Method on larger amounts of data, such as 200 points, a more stable indicator will be presented, which will allow for more reliable predictions.
The Moving Average Method is generally implemented to help identify buy and sell signals. For instance, if the current momentum of a stock is trending upwards, and the 200-day Moving Average of its price is still rising, then this would be considered an investment opportunity worth exploring. It would indicate that the stock has a greater probability of increasing in value. The key premise of this method is that prices tend to be cyclical, and that previous long-term behaviour can generally be repeated, making for a more accurate prediction of future market movements.
When using the Moving Average Method there are two basic types of analysis that can be conducted: the simple Moving Average and the exponential Moving Average. The Simple Moving Average is the traditional type of Moving Average, and it looks at the average of the entire data set over the course of a series of time periods. This method is more effective when the prices of the asset being studied are relatively stable, without a large degree of fluctuation. By focusing on shorter periods of time, the weighted averages can be more precise.
Unlike the Simple Moving Average, the Exponential Moving Average assigns values to data points that are exponentially decreasing in weight. This method is better suited to data sets with high volatility, as the focus is on more recent trends. This method assigns more weight to recent data points, thus creating a more precise analysis.
The Moving Average Method is a powerful tool that can be used to determine if trends are developing or reversing in financial markets. It is important to note, however, that the Moving Average Method is not always reliable, as any analysis based on past behaviour will not always be accurate in predicting future market movements. As with any tool, it is important to conduct research and analyse data points in order to properly utilize the Moving Average Method.
