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"Moving Averages - The Basics?" by Marc Kimsey of Accendo Markets
Video Transcription:
Moving averages are used to identify trends on a chart. Trends are an important consideration
in technical analysis.
For momentum traders, the trend is your friend -- if it's going up, buy. If it's going down,
sell.
Moving averages are also often used in combination, as the basis of more advanced indicators.
We'll tell you how to use moving averages to identify your trades in later videos.
A moving average is a set of price points plotted on a graph, each of which is the average
of a larger number of price points over a given time period. The plot line connecting
all the averages is the moving average.
[Chart Example]
By plotting a moving average, you get a clear trend line. Put simply, this can give you
a signal to buy (if the trend is up), or a signal to sell (if the trend is down).
Moving averages highlight changes in trend with a lag, meaning that signals are given
after a change in price trend. As a result, a signal is not given until a trend change
is confirmed.
The benefit of moving averages is that false signals are usually avoided as the moving
average highlights a genuine price move. While acceptable for those who are happier with
lower risk/rewards, others may prefer earlier signals. Therefore, moving averages should
be used in combination with other indicators to make decisions.
To overcome some of the lagging effect, two other types of moving average can be used;
Weighted moving average and exponential moving average. We will cover these in later videos.
Always use indicators such as moving averages in combination with other indicators to assist
in the final trading decision (for example trend-lines, price, price patterns and support
& resistance levels). Lastly, the current trend of a share should always be respected
-- pre-empting a change in trend more often than not proves costly for shorter-term traders.
Individual technical indicators should never be relied upon in isolation for trading decisions,
however strong a signal may be. Ultimately they are one of many indicators, which you
may decide to consider.