Forex

Wall Street old-timers claim that moving averages were brought to the financial
markets by antiaircraft gunners. They used moving averages to site guns on enemy planes during World War 11 and applied this method to prices. The two early experts on moving averages were Richard Donchian and J. M.
Hurst-neither apparently a gunner. Donchian was a Merrill Lynch
employee who developed trading methods based on moving average
crossovers. Hurst was an engineer who applied moving averages to stocks in
his now-classic book, The Profit Magic of Stock Transaction Timing.

A moving average (MA) shows the average value of data in its time window.
A 5-day MA shows the average price for the past 5 days, a 20-day MA
shows the average price for the past 20 days, and so on. When you connect
each day's MA values, you create a moving average line.


The value of MA depends on two factors: values that are being averaged and
the width of the MA time window. Suppose you want to calculate a 3-day simple
moving average of a stock. If it closes at 19,21, and 20 on three consecutive
days, then a 3-day simple MA of closing prices is 20 (19 + 21 + 20, divided by
3). Suppose that on the fourth day the stock closes at 22. It makes its 3-day MA
rise to 21 -the average of the last three days (21 + 20 + 22), divided by 3.
There are three main types of moving averages: simple, exponential, and
weighted. Most traders use simple MAS because they are easy to calculate,
and Donchian and Hurst used them in precomputer days. Simple MAS, however,
have a fatal flaw - they change twice in response to each price.