**Moving Averages****How to Calculate****How to Interpret****MACD****MACD Histogram**

Moving Averages

**The moving average is a trend following indicator****It does not predict future market action but follows it****Moving averages are used to identify the direction of the trend and define potential support and resistance levels****It can be viewed as a curving trendline**

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How Many Period to Average?

**The critical element is the number of time periods used****in calculating the average****The key is to find a moving average that will be****consistently profitable****Short term traders use 05-25 Period averages****Medium term traders use 26-49 Period averages****Long term traders use 50-200 Period averages**

Which Price to Average?

**Most moving average calculations are based on closing ****prices but can also be constructed using:**

**High, Low, Open****Median Price (H+L/2)****Typical Price (H+L+C/3)****Weighted Close (H+L+C+C/4)**

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Simple Moving Average - Criticisms

**The Simple Moving Average gives room to some criticisms****The first criticism is that only the look-back period covered by the average is taken into account****Another criticism is that the simple moving average gives equal weight to each of the look-back periods**

Types of Moving Averages

**The only significant difference between the various types of moving averages is the weight assigned to the data****Simple moving averages apply equal weight to all prices****Exponential and weighted averages apply more weight to recent prices****Triangular averages apply more weight to prices in the middle of the time period****Variable moving averages change the weighting based on the volatility of prices**

Interpretation I - Bullish Price Crossover

**Compare the relationship between the moving average and the security’s price****A bullish signal is given when prices rise above the moving average**

Interpretation I - Bearish Price Crossover

**Compare the relationship between the moving average and the security’s price****A bearish signal is given when prices fall below the moving average**

Interpretation II - Double Crossover

**The second interpretation uses two moving averages to generate signals****This is called the “double crossover method”****The technique involves one relatively short moving average****and one relatively long****The length of the moving averages defines the****timeframe for the system****A 5-day MA and 20-day MA for short-term****A 50-day MA and 200-day MA for long-term**

Interpretation II - Bullish Double Crossover

**Bullish Crossover occurs when the shorter average crosses above the longer one****The crossover of a 50MA above the 200MA is also known as a golden cross**

Interpretation II - Bearish Double Crossover

**Bearish Crossover occurs when the shorter average crosses below the longer one****The crossover of a 50MA below the 200MA is also known as a death cross**

Interpretation III – Triple Crossover

**The triple crossover technique uses three moving averages****The third moving average helps avoid false signals****encountered in the double crossover technique****The most popular combination was mentioned by R.C. Allen****and uses the 4-9 and 18 period moving average combination****The 4 day will follow the trend most closely, followed by the****9 day and then the 18 day**

Interpretation III - Bullish Triple Crossover

**For a buy signal, the 5-day average should be above the 10-day, and the 10 above the 20-day****If the 5-day is below the 10-day average, the signal is not valid****The entry should be activated only if the 5-day crosses above the 10-day average while the 10-day average is still above the 20-day average**

Interpretation III - Bearish Triple Crossover

**For a sell signal, the 5-day average should be below the 10-day and the 10-day****below the 20-day****If the 5-day is above the 10-day average, the signal is not valid****The entry would be activated only if the 5-day crosses below the 10-day average while the 10-day average is still below the 20-day average**

Moving Average Ribbon

**The moving average ribbon is constructed by combining eight or more moving averages****Four short term exponential moving averages****(4,7,11,16)****Four long term exponential moving averages****(25,30,35,40)****The short-term averages group represents short term traders’ view of the market****The long term averages group represents longer term traders’ view of the market**

Moving Averages in a Range

**Moving Averages work very well when****the market is trending****In a range they generate many false signals known as whipsaws**

Moving Average Convergence/Divergence

**Also known by traders as “M-A-C-D”****Developed by Gerald Appel in the late seventies, the MACD is considered one of our best mathematical tools****It is a hybrid indicator that can be used as a trend following or even momentum indicator**

MACD - Calculation

**The MACD is made up of two plots****MACD Line: (12-period EMA – 26-period EMA)****Signal Line: 9-period EMA of MACD Line**

Interpretation I - Centerline Crossover

**Centerline****Crossover –****MACD Line VS Zero Line – used for trend direction****Bullish****centerline****crossover occurs when the****MACD moves above the zero line to turn positive****Bearish****centerline****crossover occurs when the****MACD moves below the zero line to turn negative**

Interpretation II - Signal Line Crossover

**Signal Line Crossover –****MACD Vs Signal Line used for price corrections****Bullish crossover occurs when the MACD****turns up and crosses above the signal line****Bearish crossover occurs when the MACD****turns down and crosses below the signal line**

MACD Histogram

**Thomas****Aspray****developed the MACD Histogram in 1986****It measures the distance between MACD and its signal line****The histogram signals trend changes well in advance of the normal MACD signal but is less reliable**

MACD Histogram - Calculation

**MACD Histogram: (MACD Line – Signal Line)****When MACD****is crossing below its signal line, is when the MACD Histogram is moving below zero****When the MACD is crossing above its signal line, is when MACD Histogram is going above zero**

MACD Histogram - Interpretation

**The MACD-Histogram anticipates signal line****crossovers in MACD****Its downward slant implies negative divergence between MACD and its signal line and is bearish****Its upward slant implies positive divergence between MACD and its signal line and is bullish**