Moving Average Part 2

Here is a continuation (part 2) on the moving average indicator . Click HERE for Part 1.

2. The underlying trend - Support and Resistance

Think of the average as an underlying force that pulls back its objects. Say, a group of bulls walking in a same direction. One or two bulls may stray away from the group, but eventually this strayed bull(s) has a high chance of making its way back to the group.

The group of bulls here is the underlying force and the move into a direction (e.g. up/down or sideways) and they move into a direction (trend). Price can move away from the moving averages, the same manner a bull or a few bulls may stray away from the group. So, when price goes far away from the average, it tends to pull back to the average.

In an up trend, price is normally above the average and when it goes far above the average, it tends to pull back and the average acts as a support level. If this support level is broken then the direction of the up trend may change. (In part 1, I have mentioned that the trend is only changed when the direction of the moving average has changed.

In a down trend, price is normally below the average and when it goes far below the average, it tends to pull back to the average which acts as a resistance level. If this resistance level is broken then the direction of the down trend may change.

In a sideway market, there is no direction, therefore the price cuts easily above or below the moving average. In this case, the moving average does not provide any support or resistance.

Time Frame:

In part 1, I mentioned about the different time frames to determine the different trends (short, medium, long term trends). So it is up to you to determine which underlying force you are trying to identify. Imagine the long term trend is a group of 1000 bulls, while the short term trend is a group of 100 bulls.

Applying the Moving Average on the chart

The best way to apply a moving average is to find a parameter (the period used to calculate the moving average) where the moving average acts as support and resistance as much as possible.


Singapore STI chart with 10-day simple moving average using NextVIEW Advisor. Not a proper moving average to use.


Singapore STI chart with 24-day simple moving average using NextVIEW Advisor. A proper moving average to use.

The application of moving average is made simple using NextVIEW Advisor Professional because you can change the parameter on the fly. The moving average line changes as you change the parameters.