Are you using the right moving averages to follow and anticipate changes in, trending patterns in the gold and silver futures markets?
Moving averages are a basic tool for technical analysis. They are easy to calculate. But it is important to select moving average pairs that match the traders’ timeframe for analysis and outlook. I believe it is equally important that traders explore and understand the breadth of moving averages. By that I mean examining Weighted, Exponential and Triangular Moving Averages in addition to the basic Simple Moving Average.
A simple moving average (SMA) is the unweighted mean of the previous n data points. For example, a 10-day simple moving average of closing price is the mean of the previous 10 days' closing prices. [see footnote 1]
In all cases a moving average lags behind the latest price action, simply from the nature of its smoothing. An SMA can lag to an undesirable extent, and can be influenced too much by old prices dropping out of the average. In technical analysis there are various popular values for n, like 9 days, 20 days, 50 days, etc.. The period selected depends on the kind of movement one is concentrating on, such as short, intermediate, or long term. In any case, moving average levels are interpreted as support in a rising market, or resistance in a falling market.
Chart # 1 shows 9/20 day simple moving averages, with the 9 day crossing below the 20, about September 19, 2011, as the market closed at $1810 area. As the 9-day falls below the 20 day, the conventional wisdom of technical analysis, is that the trend has turned down.
Note: Trading futures and options is speculative in nature and involves substantial risk of loss.
SOURCE: Markethead.com; Quote data provided and hosted by Barchart Market Data Solutions.
But traders viewing the market with a longer term perspective, would have a different analysis when viewing the 9/20 day SMAs on the weekly chart. As seen below, the 9 day (green line) remains above the 20 day (red line) on the weekly chart below; even though prices have fallen below both SMAs.
SOURCE: Markethead.com; Quote data provided and hosted by Barchart Market Data Solutions.
But if a weekly bar chart is more appropriate for a longer term outlook, perhaps then a 20 day/50 day SMA should be substituted for the 9/20. In that case both the red (20 day) and green (50 day) trendlines continue to point upwards and the market continues above the 50 day SMA.
SOURCE: Markethead.com; Quote data provided and hosted by Barchart Market Data Solutions.
One charateristic of the SMA is that if the data has a periodic fluctuation, then applying an SMA of that period will eliminate that variation (the average always containing one complete cycle). But a perfectly regular cycle is rarely encountered in economics or finance. This is addressed by giving extra weight to recent prices, as in the Weighted Moving Average and Exponential Moving Average
Weighted Moving
A weighted average is any average that has multiplying factors to give different weights to different data points. But in technical analysis a weighted moving average (WMA) has the specific meaning of weights which decrease arithmetically. In an n-day WMA the latest day has weight n, the second latest n-1, etc, down to zero. [See footnote 2]
The graph below shows how the weights decrease, from highest weight for the most recent days, down to zero. It can be compared to the weights in the exponential moving average which follows.
WMA weights N=15
Since a Weighted Moving Average assigns more importance to recent price values, it is more sensitive to price activity than the Simple Moving Average. The Weighted Moving Average tends to stick closer to the trend. Analysts use the Weighted Moving Average in the same manner and for the same purposes as the other Moving Averages, although the advantage of the Weighted Moving Average is that it provides stronger and earlier indications to trend direction and reversal because it focuses on the more recent price data.
SOURCE: Markethead.com; Quote data provided and hosted by Barchart Market Data Solutions.
Cross-over started Sept 14, 2011, when gold closed at $1,826/oz.
Monthly bar chart
SOURCE: Markethead.com; Quote data provided and hosted by Barchart Market Data Solutions.
Exponential Moving Average
An exponential moving average (EMA), sometimes also called an exponentially weighted moving average, applies weighting factors which decrease exponentially. The weighting for each day decreases by a factor, or percentage, on the one before it. Thus, the oldest price data in the Expoential Moving Average is never removed, but they only have a minimal impact on the moving average.
The main use of this study is its smoothing function. In this way, the moving average removes short-term fluctuations and leaves ti view the prevailing trend.
Moving Averages work best in trending markets. A buy signal occurs when the short and intermediate-term averages cross from below to above the longer-term average. Conversely, a sell signal is issued when the short and intermediate-term averages cross from above to below the longer-term average. You can use the same signals with two Moving Averages, but most market technicians suggest using longer-term averages when trading only two Exponential Moving Averages in a crossover system.
As you use Exponential Moving Averages, do not confuse them with Simple Moving Averages. An Exponential Moving Average behaves quite differently from a Simple Moving Average. It is a function of the weighting factor or length of the average.
No technical indicators work 100% of the time, including any one of the various moving averages and trendlines discussed in this article.
Trading futures and options is speculative in nature and involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. All known news and events have already been factored into the price of the underlying commodities discussed.
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Footnote 1
Simple Moving Average
A simple moving average (SMA) is the unweighted mean of the previous n data points. For example, a 20-day simple moving average of closing price is the mean of the previous 20 days' closing prices. If those prices are p1 to pn then the formula is
When calculating successive values, a new value comes into the sum and an old value drops out, meaning a full summation each time is unnecessary.
Source: Markethead.com; with formula provided by Barchart.com
Footnote 2
Weighted Moving Average
In technical analysis a weighted moving average (WMA) has the specific meaning of weights which decrease arithmetically. In an n-day WMA the latest day has weight n, the second latest n-1, etc, down to zero.
When calculating the WMA across successive values, it can be noted an amount p2 to pn + 1 drops out of the numerator each day. The WMA can thus be calculated starting with the above formula but then stepping successively with just additions and subtractions, not a full set of multiplications,
Totaltoday = Totalyeseterday + p1 − pn + 1
Numeratortoday = Numeratoryesterday + np1 − Totalyesterday
The denominator, incidentally, is a triangle number, and equals 
Source: Markethead.com; with formula provided by Barchart.com
Trading futures and options is speculative in nature and involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. All known news and events have already been factored into the price of the underlying commodities discussed.
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