Let's Talk About Moving Averages

[GrowleyMonster]

How important do you think the differences are, between EMA, SMA, and VWMA (volume weighted moving averages) in a day or swing trading context?

FWIW (I know, a lot of you will say don't even worry about moving averages because they react, not predict LOL!) the indicator I rely on the most is VWMA 3 and 6, where they cross, how far apart they are, and whether the gap is growing or shrinking. I also usually have Bollinger Bands (9MA, 2StdDev.) showing most of the time. Lately I have been playing around with SMA and EMA on the same time span showing, looking at their crossovers, but not basing trading decisions on it. Of course I used to think crossed EMA's with different time spans was a useful indicator but adding a volume bias seems to be closer to a predictive model.

For visual clarity I have my VWMA 6 colored red, and all area below it tinted red, and VWMA3 and below are green, where the areas overlap is sort of an olive blend, and showing the bright green above the red is a buy-ish signal, as is red showing but the gap narrowing rapidly. If that makes sense. It is not perfect, just like no other moving average indicator is perfect, but it is the best thing I have come up with so far in terms of ease of use and predictive success in different time frames.

The thing is, non-volumeweighted averages work, too, just a little different. Some times price alone seems to be most predictive, just not as much as the volume weighted setup. That is, in my observation.

So, I am interested in what other stock and etf traders think about these moving averages, and how important the differences are between them. Mostly the opinions and observations of those who actually use them, not really so much the naysayers who think putting them on a chart is counterproductive or not "real" trading.

 

[panzerman]

So, I am interested in what other stock and etf traders think about these moving averages, and how important the differences are between them. Mostly the opinions and observations of those who actually use them, not really so much the naysayers who think putting them on a chart is counterproductive or not "real" trading.

The type and period of the MA doesn't matter. MA's, as traditionally used, don't work, because of group delay, more commonly known as lag. If you are interesting in using moving averages in finance, look up the work of John Ehlers.

 

[Arnie]

Google Richard Donchian if you want to study/apply MA's.

 

[Real Money]

They are used to denoise and filter change in a price or a price differential.

VWAP is very important, for many reasons. I use tons of averages, but I use them on all kinds of stuff. It's very complicated. I don't just put them on charts and use mechanical rules with them.

Examples:

I use three different moving averages on the index basis spread.

125 period Adaptive
100 period Least Squares
9 period Wilders Smoothed

Then I'm using crossover/momentum with the faster two to figure out turning points, regime changes, etc.

I use VWAP with st. dev bands on index differentials and index futures.

I use a classic SMA ribbon (medium periods), and Least Squares MA ribbon (fast periods) on an index basis spread that is differenced against a 10 second EMA.***

***I asked the quants over at quant.stackexchange what kind of a time series transformation you get when you sum a price process that has been differenced against a short term EMA. They haven't provided an answer.

(my intuition is that it's a "momentum preserving transform" but that's math geek stuff)

Quants build models that use complex techniques including classic time series analysis. This is stuff like lag operator, filtration, differencing, and convergence/divergence of averages with various weighting schemes.

Averages are tools that can be used in many different ways, it helps to be good at probability theory and statistics.

That guy that mentioned John Ehlers...

Ehlers invented an average that uses relative volatility in the weightings. I think it's similar to an adaptive moving average. It's called a Recursive Median Filter, a cool idea. I'm not really that big into his stuff though.

 

[GrowleyMonster]

They are used to denoise and filter change in a price or a price differential.

VWAP is very important, for many reasons. I use tons of averages, but I use them on all kinds of stuff. It's very complicated. I don't just put them on charts and use mechanical rules with them.

Examples:

I use three different moving averages on the index basis spread.

125 period Adaptive
100 period Least Squares
9 period Wilders Smoothed

Then I'm using crossover/momentum with the faster two to figure out turning points, regime changes, etc.

I use VWAP with st. dev bands on index differentials and index futures.

I use a classic SMA ribbon (medium periods), and Least Squares MA ribbon (fast periods) on an index basis spread that is differenced against a 10 second EMA.***

***I asked the quants over at quant.stackexchange what kind of a time series transformation you get when you sum a price process that has been differenced against a short term EMA. They haven't provided an answer.

(my intuition is that it's a "momentum preserving transform" but that's math geek stuff)

Quants build models that use complex techniques including classic time series analysis. This is stuff like lag operator, filtration, differencing, and convergence/divergence of averages with various weighting schemes.

Averages are tools that can be used in many different ways, it helps to be good at probability theory and statistics.

That guy that mentioned John Ehlers...

Ehlers invented an average that uses relative volatility in the weightings. I think it's similar to an adaptive moving average. It's called a Recursive Median Filter, a cool idea. I'm not really that big into his stuff though.

Wow that's a lot to think about. Thanks for that very deep reply. The guy who is good at probability theory and statistics? That's not me. But the Recursive Median Filter is an interesting idea. I hadn't thought to use volatility data to weight an average even though I often scan based on volatility and it is a factor in picking stocks to watch. Definitely I am more visual than computational, dropped out of high school so never took a lot of higher math. So graphical indicators are of somewhat greater interest to me than they probably are to some other traders.

 

[Turveyd]

Recently I've moved to using 2SMA's, 1 set to high the other to low, and a 3rd HL/2 for a mid point, an average of the low's in a upward market has proven to be a pretty good entry place and vice versa.

Width adapts nicely to market violatility and different TF's.

 

[easymon1]

Recently I've moved to using 2SMA's, 1 set to high the other to low, and a 3rd HL/2 for a mid point, an average of the low's in a upward market has proven to be a pretty good entry place and vice versa.

Width adapts nicely to market violatility and different TF's.

gettin' jiggy with it. how'd you dream this up if i could axe?

 

[Slope Trader]

How important do you think the differences are, between EMA, SMA, and VWMA (volume weighted moving averages) in a day or swing trading context?

FWIW (I know, a lot of you will say don't even worry about moving averages because they react, not predict LOL!) the indicator I rely on the most is VWMA 3 and 6, where they cross, how far apart they are, and whether the gap is growing or shrinking. I also usually have Bollinger Bands (9MA, 2StdDev.) showing most of the time. Lately I have been playing around with SMA and EMA on the same time span showing, looking at their crossovers, but not basing trading decisions on it. Of course I used to think crossed EMA's with different time spans was a useful indicator but adding a volume bias seems to be closer to a predictive model.

For visual clarity I have my VWMA 6 colored red, and all area below it tinted red, and VWMA3 and below are green, where the areas overlap is sort of an olive blend, and showing the bright green above the red is a buy-ish signal, as is red showing but the gap narrowing rapidly. If that makes sense. It is not perfect, just like no other moving average indicator is perfect, but it is the best thing I have come up with so far in terms of ease of use and predictive success in different time frames.

The thing is, non-volumeweighted averages work, too, just a little different. Some times price alone seems to be most predictive, just not as much as the volume weighted setup. That is, in my observation.

So, I am interested in what other stock and etf traders think about these moving averages, and how important the differences are between them. Mostly the opinions and observations of those who actually use them, not really so much the naysayers who think putting them on a chart is counterproductive or not "real" trading.

-

Hi Growley,

My experience has been a bit different than others here. I trade nondiscretionary rules-based systems that I backtest as carefully as I can. In my testing I almost always find that the type of MA matters and the period matters very much and MAs can be used in multiple ways to create decent entry setups.

For example, a component of an entry setup can involve:
a candle crossing and closing on the other side of an MA line or
prices returning to an MA that has become support or resistance or
designing a system so that when MA X is above MA Y, one will only take long signals that are determined by something else like current price action and/or other indicators and when it's below MA Y only take shorting entry signals or
only take buy signals when prices are above a certain medium term MA, etc.

In all of these cases, testing and trading showed that some MAs and periods give much better results than others. More precisely, results from applying the complete set of rules for entry, stop-loss, and exit for the specific strategy being examined always shows which MAs work well and which ones do not.

 

[GrowleyMonster]

-

Hi Growley,

My experience has been a bit different than others here. I trade nondiscretionary rules-based systems that I backtest as carefully as I can. In my testing I almost always find that the type of MA matters and the period matters very much and MAs can be used in multiple ways to create decent entry setups.

For example, a component of an entry setup can involve:
a candle crossing and closing on the other side of an MA line or
prices returning to an MA that has become support or resistance or
designing a system so that when MA X is above MA Y, one will only take long signals that are determined by something else like current price action and/or other indicators and when it's below MA Y only take shorting entry signals or
only take buy signals when prices are above a certain medium term MA, etc.

In all of these cases, testing and trading showed that some MAs and periods give much better results than others. More precisely, results from applying the complete set of rules for entry, stop-loss, and exit for the specific strategy being examined always shows which MAs work well and which ones do not.

Your perspective I think is more like than unlike mine. Thanks for sharing your views.

Here is one of my charts. MA crossings might be indicative and not predictive, but I have always thought that the nature of trends is to continue until halted or reversed by something. So a signal that is lagging a bit can still be of some value. If price action were random, and I mean truly random, then trends would be rare, coincidental, and the next price move unpredictable by any means. I have always thought that simply not fully being aware of, or understanding, the forces behind a trend in no way invalidates or negates them. This is why traders who disregard fundamentals and concentrate only on data, can be as or more successful than those who trade the news.

 

[easymon1]

i like 'em with hamsters, i mean hammers, engulfing reversals, dojis showing indecision by the driver.