Moving Averages are Random

Q3D said:
The angle of moving averages is not a predictor of future price direction. MAs are not effective as a support or resistance level due to price's random behavior around them.

Let's look at Crude Oil in 2014 and early 2015 to see an example of how moving averages and slopes of moving averages are useless. The 200-period moving average did not start a clear angle downard until after CL moved to the lower 70s. PA guru logic would suggest a test of the 200 and 100 period weekly charts should occur, there never was such a test, selling continued until exhaustion without a concern for higher-period moving averages and failures at them, which according to PA guru-logic should be the signal to strengthen the bears' case for further selling.View attachment 164011
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If your indicator of choice doesn't work as you expected it, try dividing the period by 4 or multiply the period by 4, and see if you see a new pattern emerge.

I'm not saying this will predict anything, nobody here did. I'm saying this may broaden your mind to possibilities, if you allow it to.

How does price move, and what can you deduce from it? It's a long road. Don't necessarily need indicators, but you do need to find your own strengths, honing them.

So, if price direction doesn't tell you price direction, what does that tell you?
 
The best equity index price / moving average crossover process is monthly basis. It "contains" many of the false signals / whipsaws that a daily derived price / moving average crossover produces and one doesn't have to sit in front of a computer day in and day out to follow it.

James
Director of Quantitative Research
XOXOX
Boulder, CO
 
MA is NOT random, it is the average of the prices (usually closing price of a bar) in a given period. Saying MA is random is like saying a students daily average over the course of a year is random. It's absolutely not.

That said it is not necessarily predictive of future performance as it only indicates the average of past performance. However, past performance can be slightly indicative of future performance in the absence of any additional forces to change the behavior.
 
limcheese22 said:
Do not forget indicators/price actions are self-fulfilling...
Everyone is looking at those levels mean you should not ignore it...
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Only if a lot of people are trading the same way.

Stock swing trading D1 9sma, 21ema, 50sma and 200sma worked great many many many years back.
 
Q3D said:
The well-respected trading technician and (imo) non-guru Adam H. Grimes has come to the same conclusion I have, which is that price behavior at moving averages is random and unreliable when used to predict future price direction. Here are some highlights from this discussion on his blog:


"I have done extensive quantitative work on moving averages, and the answers I have found challenge many of our ideas and many of the ways technicians use moving averages. Based on my work:

There are no “special” moving averages. (I.e., the 200 day is not special compared to the 193, 204 or any other average.)
Pricing crossing or touching a moving average does not have significance for future market direction.
The slope of a moving average is not a meaningful indicator of trend.
Crossings of moving averages are not meaningful indications of trends.
Indicators built from moving averages are not reliable indicators of trend.
In short, most of the things that traditional technical analysis teaches about moving averages do not stand up to quantitative scrutiny.
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The day opens and there is a trend. The Trend has to develop. This can be said for every day. There can be a 2 day trend......3 day......out to infinity I suppose. So the question is.......just how can the TREND be calculated. There is a way to do it. How do you know if you have done it correctly? The answer is very simple. The TREND that one calculates will ALWAYS BE THE SAME no matter what chart you use. So let's say you want to compare the TREND for a 5 minute and 1 minute chart. At the end of 1 hour on both charts, you should have the same TREND.

A trend therefore must be calculated period by period, bar by bar. I have done this and I do not use moving averages because I do not know what chart to use or what average to use.

So the only reason there should be a difference is rounding errors and also sensitivity. The 1 minute bars will calculate the trend more frequently than the 5 minute bars but the TREND is the TREND no matter what. I only use the calculation for a TREND. Here is what this looks like.
trends.jpg

So the next question is how can one use this to take a position assuming that I am actually correct and that there is really just one trend that can shift. So the answer to this is actually very simple as well. If you KNOW that a trend is down.....then you should try to be a seller and go with the flow. If it is up then try to buy. Now that probably seems rather obvious but that is the way it is. As to how to enter that is a totally different topic than what this is about. What matters is that in the example I posted we get basically the same calculated number for the maintrend which is the YELLOW LINE. It will always be this way. This means that there is no special chart or no special moving average......there is only price, activity and direction.

So just how far away from a TREND which can be quantified should one actually engage in taking on a position? I guess that is what makes a market. I hope this shows the faith based crowd that there is no reason to have faith, just use math to find the answer.
 
d08 said:
You're still tinkering with MAs? 200 day MA has meaning simply because many still pay attention to it. You do realize it's just an average price right? and there is nothing special involved?
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%%
I agree;
with the first part-200 dma. Good point.

BUT since its a real helpful measure of the difference between a bull trend + bear trend;
you want to cut a loss NOW on your post??. Later could ruin your trading??
 
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