Technical Analysis v Fundamental Analysis
(iv) Volume - this is very simple and works on the proven principle that volume generally leads price and should also confirm price. For example, if a stock price is rising on strong volume then this is good, whereas if a stock price is falling on strong volume then you should watch out if long. I personally find, at bottoms in particular, that when strong volume occurs in the latter stages of a prolonged downtrend and the stock price/index etc rises on that day that this signals a final clearance of overhanging selling pressure and thus a platform to move up. (v) Moving averages - There are 3 types of moving average measures - simple, weighted and exponential - the latter being similar to the weighted average and so I will look to explain just the former two here.
So the 50 day moving average would simply be the sum total of the 50 day price of that particular index divided by 50. You can quickly see how if a stock price is rising then the 50 day moving average would be rising and vice versa if falling. The weighted moving average essentially weights the most recent prices at a higher figure and so should be, at any one time, closer to the underlying price instrument than a simple moving average. For example, using a 10-day weighted moving average you would take the closing price of the 10th day and multiply this number by 10, the ninth day by nine, the eighth day by eight and so on to the first of the moving average. Once the total has been determined, this is then divided by the number of days the WMA is being calculated for.
The simple moving average is exactly as its description states, an average over a particular period, for example 50 days, displayed as a moving price line.
June 2012 | www.financial-spread-betting.com | 23