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The highest trading profits are generally made in strongly trending markets, and the best way to detect trends, and changes in trends, is by the use of moving averages. Moving averages are average prices of a security or index over a specific time interval that is continually updated. Because prices are averaged, the daily fluctuations are dampened into a smoother line that better represents the current trend. The strength of the trend is indicated by the slope of the moving average, especially longer-term moving averages. Moving averages are also used in other technical indicators, such as Bollinger Bands, envelopes, and directional movement indicators. Simple Moving Averages (SMA) A simple moving average (SMA) is simply the average of prices of a security or index over a specific time span, such as 5, 10, 20, or 50 days. They are called moving averages because they are calculated for each trading day for the previous period, so at the end of a trading day, the last day is added, while the earliest day of the previous average is dropped. Most moving averages are based on closing prices, but they can be based on opening, high, low, or mean prices. Whichever price is chosen must be used consistently to give the best indication of trend.
(Rated by 2 Council Members)
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