Investing with the Trend: A Rules-based Approach to Money Management

Chapter 12Popular Indicators and Their Uses

To begin Part III, we need to review a few basic technical indicators that are referenced frequently. Their concepts are used throughout this part of the book. Remember Part III is the creating of the weight of the evidence to identify trends in the overall market, a ranking and selection process for finding securities to buy based on their individual and relative momentum, a set of rules and guidelines to provide you with a checklist on how to trade the information, and the results of my rules-based trend following strategy called Dance with the Trend.

Moving Averages and Smoothing

Most times daily stock market data is too volatile to analyze properly. There needs to be a way of removing much of this daily volatility. There is a way, and that is the subject of this section on smoothing techniques. Smoothing refers to the act of making the time series data smoother to remove oscillations, but keeping the general trend. It is a better adverb to use than always trying to explain that you take a moving average of it or take the exponential average of it; just say you are smoothing it. Some of the advantages of doing this are:

• Reduces the day-to-day fluctuations.
• Makes it easier to identify trends.
• Makes it easier to see changes in trend.
• Provides initial support and resistance levels.
• Much better for trend following.

One of the simplest market systems created, the moving average, works almost as well as the best of the complicated ...