Moving Averages

As you already might have observed, the technical analysis may be of such a degree of subjectivity that two analysts might have different points of view about a determined formation. The moving averages constitute a step forward in the intention of giving it a greater scientific characteristic.

A moving average is an average of the closing prices (sometimes it is also used with intermediate prices) registered among several days. For example, a moving average of ten days covers the prices of the last day, leaving out the oldest price.

It is an ideal instrument for following a tendency. The moving average (that when it is present in a chart takes the form of an wavy line that travels through the price movements) flattens the tendency. and this permits the analyst to observe if the prices are within or without the line. In this way, since it goes behind the market, it tells us if the tendency is still continuing its curse or if it has experimented a change.

The sensibility of a moving average to the price movements depends on the number of days that it covers. By a general rule, the lesser days it covers, the nearer you will follow these movements. A moving average of five or ten days, for example, will be nearer to the evolution of the market than one of forty days.

Because of its easy calculation and programming, the moving average can be incorporated to the actual computing systems that observe the markets.

Oscillators
An oscillator is a line that situated on the lower part of a chart of bars it develops around a representative line of the middle point and within a band of prices whose limits are based in historical extremes. The line that the oscillator forms is a measure of the speed or impulse of prices, that is, of the fastness or frequency in which they change. When the speed of change increases, the line deviates from the middle to follow any of both limits of the fluctuating band.

If the prices rise, the line goes towards the upper extreme or positive zone and if they fall it goes towards the negative zone below the middle: as with the moving average, an oscillator of five days is more sensible than one of ten.

If the line touches the lower extreme part of the fluctuation band, the oscillator is telling the analyst that the market is overbought. That is why the oscillators are especially useful in the horizontal tendencies. On the other hand, a divergence in an extreme position between a price movement and an oscillator is usually a notice that it is imminent a price correction. That is that the price has gone too far too fast. Some analysts even see in the crossing of the middle line (or zero). A sign for buying or selling although, of course, always jointly with other technical considerations.

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