These are my notes on the trading term, moving average (MA). A moving average figures out the average of recent data, shifting and updating the average as new data appear and the oldest disappear.
A moving average calculates the average of a specific set of data points, and updates the average as the data points changes (forward or backward).
Interpreting the moving averages
You should always ask why other traders use their moving averages.
If the trader is parroting what other traders say, then they are not explaining why.
If the trader is explaining why, then you need to figure out if it fits your trading methodology and explain why.
One common theme I am noticing is a slight difference between different moving averages.
Using the Fibonacci sequence
A common approach to trading some traders use is integrating the Fibonacci sequence as part of their trading methodology.
Understanding the fibonacci sequence
The Fibonacci sequence is a series of numbers that starts with zero and one as the first two numbers, and uses the sum of the previous two numbers to set the next number in sequence.
The following list details the numbers in sequence for the first ten numbers (including zero and one).
- 0
- 1
- 1
- 2
- 3
- 5
- 8
- 13
- 21
- 33
If you are going to set up a trading methodology, it should be consistent from your lagging indicators (moving averages) to your leading indicators(divergences). While researching the Fibonacci sequence, I realized some of these numbers were fairly close, and others were further apart than I expected.
For example, assets such as stocks are usually traded within a specific time-frame (Monday to Friday).
With the exception of trading holidays, the average week is five days which matches up with the Fibonacci number five.
The next sequence, eight, is close to (but does not match) a full two-week trading session or ten days.
The following sequence, twenty-one, is close to a full four-week trading session. The numbers start growing apart a little more after that. The following table will explain it more in detail.
By taking the emotion out of comparing my experience against theirs, I boiled down the
| Fibonacci numbers | Similar numbers | Interpretation | Trading period |
|---|---|---|---|
| 0 | N/A | Starting point | None |
| 1 | N/A | Opening price | 1 day |
| 1 | N/A | Closing price | 1 day |
| 2 | N/A | Second full data point | 2 days |
| 3 | N/A | Third full data point | 3 days |
| 5 | 5 | Momentum | 1 week |
| 8 | 9, 10 | Short-term trend | 2 weeks |
| 21 | 18, 20 | Mean reversion | 1 month |
| 55 | 48, 50 | Strong up-trend support | 2.5 months |
| 89 | 100 | Dip-buy alert | 4.5 months |
| 233 | 200 | Trend shift | 1.1 years |
| 377 | 250 | Fair value | 1.8 years |
| 610 | N/A | N/A | 2.9 years |
My observations
There are many types of moving averages. A lot of traders seem to recommend specific ones based on their own blend of education and experience. The educational portion seems to be based on the success of past traders or statisticians.
| Fibonacci numbers | Similar numbers | Interpretation |
|---|---|---|
| 5 | 5 | Momentum |
| 8 | 9, 10 | Short-term trend |
| 21 | 18, 20 | Mean reversion Short-term cross-over |
| 55 | 48, 50 | Strong up-trend support Mid-term cross-over |
| 89 | 100 | Dip-buy alert Mid-term to long-term pull-backs |
| 233 | 200 | Trend shift Long-term pull-backs |
| 377 | 250 | Fair value |
Guiding tables
The following tables are in-progress.
If the price is…
| 5-day | 8-day | 21-day | 55-day | Action | |
|---|---|---|---|---|---|
| Price is | above | below | below | below | Wait |
| above | above | below | below | Wait for support confirmation on the 5-day MA | |
| above | above | above | above | Wait for support confirmation on the 5-day MA | |
| above | above | above | above |
If the 5-day moving average is…
| 5-day | 8-day | 21-day | 55-day | Intra-day action |
|---|---|---|---|---|
| trending down | below | below | below | Wait |
| trending down | above | below | below | Wait |
| trending down | above | above | below | Get out |
| trending down | above | above | above | Get out |
| trending up | below | below | below | Wait for support confirmation on the 5-day MA |
| trending up | above | below | below | Wait for support confirmation on the 5-day MA |
| trending up | above | above | above | Wait for support confirmation on the 5-day MA |
| trending up | above | above | above |
Cross-overs
5 MA crossing above 8 MA and 13 MA – Bullish trend shift
8 MA crossing above 15 MA – Short-term entries
50 MA crossing below 200 MA – Death cross
5 MA crossing below 8 MA and 13 MA – Bearish trend shift
50 crossing above 200 MA – Golden cross