First, it is important that the close penetrates the channel. Penetrations of the high or the low are more often indications of temporary overbought or oversold conditions in the market, rather than a change in trend. Second, the extent of penetration of the close is important. There is a general technical rule of thumb, that 3% of current market price is the minimum amount of penetration through the trendline required to validate the breakout. This should be adjusted to market and trader requirements though. Third, increased volume on the dav of prenetration is considered the final confirmation of a legitimate breakout.

Moving Averages

Moving averages are the most versatile and widely used of

all technical indicators. Basically, the averages are a smoothing, or trend following device with a time lag. It is important to note that the averages are a lagging indicator and should be used for confirmation of trend.

Moving averages are simply the averages of a set amount of closing price data. For example, if a 9-day average is desired, the closing prices for the last 9 days are added and the total is divided by 9. The most common way to calculate the moving average is to work from the total of the last 9 days' closing prices. Each day the new close is added to the total and the close 10 days back is subtracted. The new total is then divided by the number of days (9). Shorter moving averages e.g. 4-day are more sensitive and hug the price action more closely than the longer averages (30-day, 100-day).

One method used to generate trading signals is to look for

price action to cross over the moving average. Another way is to use a double crossover method. This means that a buy signal is produced when the shorter (9-day) average crosses above the longer (18-day) and a sell signal occurs when the 9-day crosses below the 18-dav moving average. Although this technique of using two averages together lags the market a bit more than the use of a single average, it will produce fewer whipsaws.

Moving averages lag price movements, but this is

acceptable as the average will smooth out "noisy" data. Moving averages can be constructed for any period of time one chooses, but the higher number of days averaged, the more sluggish the average becomes. Many commodity traders find that shorter averages, such as the 3-day, tends to be too volatile. They use instead, a combination of averages. A popular combination is the 4, 9 and 18-day averages. For a longer-term indicator, a 30-day average may also be used, along with 50-day averages or longer. As the moving averages are a lagging technical indicator,

they will almost never position one in the market at precisely the right time. Instead, they help to take profits from the middle of a trend and hold losses to a minimum.

Vocabulary

ae

to validate — óñòàíàâëèâàòü

to penetrate — ïðîíèêàòü

rule of thumb — çäðàâûé ñìûñë, îïûò

'moving' averages — ñêîëüçÿùèå ñðåäíèå

ý:

'versatile — ìíîãîñòîðîííèé ãèáêèé

lag — îòñòàâàíèå

to hug — äåðæàòüñÿ, ñëåäîâàòü

ý:

to occur — ñëó÷àòüñÿ

i

'whipsaw — ìîøåííè÷åñòâî, äâîéíàÿ âûãîäà

ë 'sluggish — ìåäëåííûé, èíåðòíûé

ei

to weight — âçâåøèâàíèå êîìïîíåíòîâ

ñòåïåíè çíà÷èìîñòè

å

exponential — ýêñïîíåíòíûé

## Types of Moving Averages

Although technicians use moving averages as a trend following system, there are various methods used to calculate a moving average. The differences occur due to the weights each day's price is given.

A simple moving average gives each price equal weight, and the average is a simple summation of N number of days divided by N.

A weighted moving average gives each price a different weight relative to its position in time. The most common form of weighted average is to give the first price (most historical) a weight of 1, the second a weight of 2, the third a weight of3, etc. up to the number of days in the average. In this type of average the most recent price has the largest effect on the calculated value.

An exponentially smoothed moving average is calculated by taking the previously calculated value and adding a certain percent of the difference between today's price and the previous calculated value. This type of average gives greater weight to the most recent prices.

Studies have shown that there is no single "ideal type" of moving average or moving average period. Choosing a moving average and testing its profitability, via optimisation studies, continues to be the most popular method.