TREND-RELATED INDICATORS

While trend lines remain the most effective ways of determining whether a trend is in
place, many indicators have arisen that go further in detecting changes in the trend. Moving
averages and their variations are often used by traders. Let’s consider some of them
and how to apply them to help understand the trend.
The basic technical indicator used to help interpret the trend line is the moving average.
It has many variations. The most popular is the simple and exponential moving
average. Other variations, such as the weighted and adaptive, have been developed to
provide traders different views on filtering the price information. What is important is to
realize what the moving average does and what it cannot do. Moving averages are inherently
late to the party. They lag behind the information and therefore have limitations on
their use as triggers to put on a trade. But they are valuable in mapping the contours of
changes in the trend.

The simple moving average acts as an easy way to smooth out the price data. It’s
a basic algebraic average that adds a new period and drops the first as time moves on.
In the simple moving average, each period gets the same level of importance. This has
disturbed some traders because earlier periods are overvalued. The exponential moving
average provides greater weight to the most recent periods being considered, and this
reduces the lag of the resulting curve. There are many variations emerging on how to
minimize the inherent lag of moving averages, such as adaptive moving average, fractal
adaptive moving average, median adaptive moving average, and triangular moving
average. The triangular moving average weights middle periods more than the earlier
and later periods. Traders are always coming up with new moving average versions to
test out.
Which moving average is better? That depends, of course, on how the use of the
moving average contributes to trading success. In Figure 12.3, compare the simple moving
average to the exponential moving average and the triangular moving average. It’s
hard to answer that question. They are very close. For the trader, consistency in use is
more important.

A consideration for the trader is to choose which time period to use for the moving
average. The 50-period is considered an important hurdle, and when it is probed or
penetrated, the trader needs to pay closer attention because it is considered important.
Combining two moving averages where one period is longer than the other creates
the moving average crossover. The idea behind it is to overcome the lag of one moving
average. There are many variations of periods to use in a crossover. The 55-period versus
the 5 and the 13 versus the 5 offer examples of how to use them. When a crossover
occurs, traders will look to enter a position or exit one that assumed the previous direction,
providing further confirmation is achieved.




By ABE COFNAS