There are many factors that a moving average should understand before it can provide accurate results. The most important factors are whether the moving average is the last price change at a certain point in time, if it goes from high to low, when it changes direction.
To achieve the desired moving average, the moving average must be set to some specific index such as the S&P 500. The moving average for any index in this type (or any index) must pass a number of criteria.
For example, consider the price movement of the Dow Jones Industrial Average, as shown below.
The moving average is defined to be the last change of the price in one time period at that point in time only.
In this example, the Dow is moving from around 14,990 at the start of this chart to 12,650 when it hits 13,824.
If the market had moved from 11,859 at the start of the chart to the current level then it would be considered a moving average.
The chart above shows the index level to calculate if the moving average had passed the number of changes needed to make it an accurate indicator of future trends. This number of moves is referred to as the limit of deviation.
The best way to determine where the moving average is in relation to the price of the index that created it is to set the moving average to the lowest value possible at the time the chart was created. This move is called the target value.
If the target value is later lowered to the minimum, the moving average will continue to move higher as the new value is passed.
The chart shown below will show you how the Dow Jones Industrial Average moves up and down from time to time.
The Dow Jones Industrial Average is the S&P 500 and therefore moves up and away from a fixed number of times over time. It moves from about 13,000 in the beginning of the diagram to 12,650 when the price reaches 13,824.
Another important factor in determining the direction of an index is what is known as the target price. The target price refers to the closing price of the index at the time when the moving average is set. The more an index moves from lower to higher, the higher is the target price for that move. The higher the target price is, the lower is the range of possible moves it can move between.
The move of the Dow Jones in chart above as shown below is determined to be
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