Level 02

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3. Moving Averages

What is a Moving average?

1. Moving averages tone down fluctuations- Deemphasizing but sometimes distorting fluctuations
2. TA’s use moving averages to smooth erratic data, making it easier to view the true underlying trend.
3. The principal reason why moving averages are used is to smooth out shorter fluctuations and focus
on trend that fits with investors time horizon
4. Discuss how sma is calculated.
5. Discuss in brief about Length of MA and using Multiple MA.

Other Types of MA
1. The Linearly weighted moving Average (LWMA)
2. Exponentially Smoothed Moving Average (EMA)
3. Geometric Moving average (GMA)
4. Variable EMA’s

Strategies Using MA
1. Determining Trend ( cross overs)
2. Determining Support and Resistance ( Trending markets)
3. Determining Price extremes
4. Giving Specific Signals

What is Directional Movement?

1. Developed by Welles Wilder in 1978
2. Positive Directional Movement occurred when the high for the day exceeded the High for the previous
day. Vice versa for Negative Directional Movement
3. DIs can be used to create a directional Index (DX)
4. This DX is then used to create an Average DX called ADX line.

What are Envelopes, Channels and Bands?

1. Price Movement is centered around MA but falls within a band or envelope around the MA .
2. By determining the band within which prices tends to oscillate, the analyst is better able to determine
the ranges in which price may be expected to fluctuate
3. Eg. Percentage Envelopes ( problem is that they do not account for changing volatility)

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Level 02
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Bands
1. Bands are envelopes around the MA but, rather than being fixed in size, they are calculated to adjust
volatility around the MA
2. Volatility is measured using either Standard deviation or ATR.
3. Bollinger Bands use Standard Deviation
4. Keltner uses ATR
5. STARC uses ATR for 5 periods

Channel
1. Channels here have a slight relaxing definition as compared to that of a Channel in trendline.
2. Good example is a donchian Channel
3. This Method does not require construction of a trendline; the only requirement is a record of Highs
and Lows over the past specified period. In case on Donchian Channel it is 20 days ( 4 weeks)
4. We take a trade on breach of any channel in the direction of the Breach. Such systems are “ Stop and
Reverse” and are almost in the Market.

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