A "moving" average is simply an average that is continuously recalculated.
A 50-day moving average
of a price is an average of the past fifty days of
closing prices that is recalculated daily. To roughly
recalculate this moving average, simply compare the
price you are adding to the moving average
(i.e., today's closing price) to the price you are
taking off (i.e., the price ten weeks ago). If the
will go down (i.e., downtrend).
Therefore, to anticipate the
direction the moving average will head next, simply compare the
price area of the past few weeks with the prices
around ten weeks ago. In other words, if current
prices are clearly higher than they were ten weeks
ago, we can anticipate the ten-week moving
average will continue to move up; if lower, we can
anticipate it will continue to move down.
For example, if eight, nine and ten weeks ago the S&P
was trading in the low 1100's and it is
trading in
the mid 1300's now, we can safely assume that the moving average will continue
to
move up over the next few weeks. Numbers around 1100
are going to be dropped off the moving
average and numbers in the mid 1300's will probably
be added; therefore, since the numbers to be
added are higher than those that are going to be
dropped off, the average will move higher.
However, we are simply anticipating the most likely future direction of the moving average, not its
guaranteed direction. Keep in mind, should the
current numbers (prices) suddenly change
significantly, then our anticipation of the future
direction of the moving average must also change.
This "anticipation" concept is one you
absolutely must fully understand in order to be able
to anticipate the movement of trend/momentum
indicators (i.e., the lines). Therefore, to
repeat, in order to anticipate the most likely
immediate future movement of any moving
average, simply compare the numbers you will most
likely be adding to the moving average to
the numbers you will be dropping off. If you expect
to be adding higher numbers than the
numbers to be dropped off, then anticipate that the
moving average will move up; if the
numbers most likely to be added are lower than the
numbers to be dropped off, then anticipate
that the moving average will go down.
To
help me
anticipate the future movement of the trend line,
the first action I take when looking
at
a chart is to count back ten weeks and circle the prices from the middle of
that week. This
way
I am able, at a glance, to anticipate how likely or unlikely it will be for the
trend to change
in
the immediate future. I do this by visually comparing current prices to prices
ten weeks earlier,
i.e.,
those in the circle. If they are roughly the same, then the line could turn
easily; if they are
far
apart, then the line is unlikely to change direction anytime soon.
Look
at the charts of the March Unleaded Gas and March Silver on the preceding pages
and
compare
the current prices to the prices ten weeks earlier. Do this and you will see at
a glance
how
difficult or easy it would have been to turn the existing trends. Suggest you
also take a period
a
month or two earlier and count back ten weeks from there and make the same
comparison;
then
see for yourself what the trend did in the ensuing weeks.
When
trading futures we want to be positioned not only with today's trend/momentum,
but
even
more so we want to be positioned with tomorrow's trend and momentum. However,
be
clear
about what we are doing here; we are not trying to predict tomorrow's prices. What
we are
trying
to do is "anticipate" what our reasonably reliable trend/momentum
indicator lines will
look
like
tomorrow, and the few days after.
The
basic idea is that it is easier and more effective to anticipate or predict the
future movement
of
trend/momentum
lines than it is to anticipate or predict price. Therefore, what we do
is look
at
the current price trend/momentum indicators, anticipate what these indicators most
likely
will
look like over the next few days, and then position accordingly. We are trading
price, but we
make
our trading decisions primarily by anticipating the most likely future
direction and location
of
our reasonably reliable trend/momentum indicators. If these indicators are
pointing up, we
trade
from the long side; if they are pointing down, we trade from the short side.
So,
when using moving averages as indicators of trend/momentum, it is imperative
that you constantly
look
back at the numbers you will be dropping off the various moving averages and
compare
these
numbers to the ones most likely to be added. Whenever I look at an SMR chart my
eyes
immediately
check the numbers coming "off" of each of the three lines and compare
these with
the
numbers most likely to be "added." I do this starting with the trend,
then going to the intermediate-term line, and finally to the short-term line. I
do this every time, without fail, always] I
do
this because it is the best way to anticipate where the lines most likely will
be tomorrow and
the
few days after that. You would be wise to train yourself to do the same.
We
trade futures, not presents or pasts; therefore, anticipating the near term
(i.e., next few days)
future
location and direction of the trend/momentum lines is of utmost importance.
While the
future
price is unknown, it is possible to make an educated "guesstimate" of
the future direction
and
location of our reasonably reliable trend/momentum indicators (i.e., the
lines]. Since these
indicators are
directly related to the price movement, if we are consistently positioned with
them, then we should be
consistently on the right side of price
movemen