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A moving average primer

Moving averages come in various flavors and sizes. They range from simple, to weighted, to smoothed and exponential. Traders use them alone, or in combinations as crossovers, even triple crossovers. They use them in oscillators as moving average convergence/divergence, and in bands. The basic underlying assumption here is that, more often than not, markets move in a trending fashion. I should mention that not everyone believes this statement is true. A contingent of academics feels market movements are random in nature (the “random walk theorists”), but I believe you can prove fairly easily to yourself that random walk is bunk. Although markets can be random in a short period of time, just look at any chart of any commodity of at least four to six months in length. You'll see the trends unfold before your eyes. When demand for a particular commodity, or a financial asset, is stronger than supply, prices (and therefore, the market) move in an up-trend. When supply is overwhelming demand at any particular point in time, the market trends downward.

Chart 9.1. Early uptrend turns into major downtrend



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