Moving Averages are one of the most widely used technical indicators and are highly popular with technicians or those traders who use technical analysis in their trading a lot. Many automated trading systems also depend on moving averages (MAs). These MAs are used to signal a change in the trend as well as smooth out volatility in the market.
The simple moving averages (SMA) like the 20 period or the 100 period that takes the simple average of the closing prices in the last 20 periods or 100 periods are the most popular. Now, the problem with the MA is that it is a lagging indicator. What this means is that it gives a signal after the trend starts or ends.
Now it is a well known fact that many traders lose money using the MA Systems. The reason is simple if majority of the traders use the same MA as predetermined by the default settings in the charting software or the hot favorite 200 period MA, you are bound to lose as a trader since most traders are using these MAs in getting their trading signals.
If you want to make money with MAs than use a different set of values as compared to those being used by the majority of the traders. If the traders are using the 20, 50, 100 or 200 period MAs than don’t use them in your trading system. One way it to use the pivot point moving averages.
Pivot points are calculated by dividing the high (H), low(L) and the close(C) by three. PP=H+L+C/3. Now, pivot point price is a more accurate picture of the true average price of a period rather than the closing price that is used in calculating the moving averages.
Now, what time period to use in calculating the pivot point moving average (PPMA). The best time period is the three period pivot point MA system that is obtained the dividing the three latest pivot point of the past three periods. The three point PPMA can act as a support number in case of a bullish market and as a resistance number in case of a bearish market.
Now when the market changes direction from an uptrend to a downtrend, the price action will tend to bounce off the three period pivot point MA as a support and then when the downtrend develops, it will bounce as a resistance.
You can also identify tops and points with this pivot point MA. For example, suppose point A in price action is lower than the point B but you find the pivot point MA at point A lower than that at point B. You can take it as a moving average divergence. This is a strong clue that the market has peaked and a reversal is about to take place.
So, you can use these pivot point moving averages as a way to filter out market direction as well as determine the true market direction. The slope of the pivot point moving average can help you determine the market direction. If the slope is up, it means the market is trending up and of the slope is down, it means that there is a downtrend.
When the market goes from a trending phase into a consolidating phase, it is the slope of the pivot point moving average when combined with the high probability top or bottom forming candle pattern can give you a strong signal about the likely trend continuation or trend reversal.
Whatever, a pivot point moving average uses more than the closing price of a period rather it uses the true average that incorporates the range of the period and can give you a better picture than the simple moving average.
The post Pivot Point Moving Average System – A Better Alternative To SMA appeared first on Big Financial BLOG.
source http://blog.bigfinancial.co.uk/pivot-point-moving-average-system-a-better-alternative-to-sma/
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