Overview
Moving averages are a technique of classic time series analysis.
Moving Averages are typically used in strategies that purport to follow trends. That is, if the current price is above a given moving average, then that indicates the asset is in an upward trend and is a buy. If the current price is below the moving average, this would indicate that the trend is down and should be sold.
Trend following is pitched as being a strategy that can work in both bull and bear markets, because the trader is following the trend.
Indicators
Moving averages are typically used when trend following. However, there are several different indicators built from moving averages that are commonly used.
- Price Minus Moving Average :
- Moving Average Minus Moving Average :
- Moving Average Convergence/Divergence :
- Adaptive Moving Average
- Volume Weighted Moving Average
Moving Average Whipsaw
The moving average whipsaw is a situation that occur when an asset is trading within a price range, and the trader is trading the asset using a moving average and following the trend.
When the price (blue) goes above the moving average, the trader buys. This works initially, but then the price turns around. The trader stays in the trade until the price crosses the moving average again.