TAILIEUCHUNG - Trend Forecasting With Technical Analysis Chapter 4

Chapter 4 TODAY’S MARKETS HAVE CHANGED. Why Trend Forecasting Beats Trend Following and How Traders Can Profit. Moving averages are one of the most popular technical indicators used to identify the trend direction of financial markets. Moving averages form the basis of a myriad of singlemarket trend following trading strategies | Chapter 4 TODAY S MARKETS HAVE CHANGED Why Trend Forecasting Beats Trend Following and How Traders Can Profit Moving averages are one of the most popular technical indicators used to identify the trend direction of financial markets. Moving averages form the basis of a myriad of singlemarket trend following trading strategies ranging from the popular 4-9-18-day moving average crossover approach to the widely followed 50-day and 200-day simple moving averages used to assess the market trend direction of broad market indexes and individual stocks. Figure 4-1 on the next page depicts the Dow Jones Industrial Average with its 200-day moving average superimposed on the daily price chart. This indicator is used extensively by technicians and traders as an indication of The Dow s trend direction. When The Dow closes above its 200-day moving average the market is considered to be in an uptrend. When The Dow closes below its 200-day moving average the uptrend is considered to be broken as a bearish sentiment permeates the market. Moving averages are precisely calculated according to specific mathematical formulae. This makes moving averages an objective way to determine the current trend direction of a market and anticipate its most likely future direction. This is in sharp contrast to subjective approaches to trend identification based on visual chart analysis of reoccurring patterns such as head-and-shoulder formations flags triangles and pennants etc. Trend Forecasting With Technical Analysis 59 Source Mathematically moving averages filter out the random noise in market data by smoothing out fluctuations and short-term volatility in price movement. Graphically superimposing a moving average on a price chart makes it easy to visualize the underlying trend within the data. Moving Averages Are Lagging Indicators However traditional moving averages have one very serious deficiency. They are a lagging technical indicator. This means that moving averages due

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