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The Traders Wheel
2/15/99 by Alan Farley

Moving Average Rainbows – Part 1

Moving averages provide highly intuitive feedback as they interact directly with price. Indicators placed in a separate lower graph force the eye to sift through large quantities of noise to identify usable information. While that analysis will produce powerful results, the filtering process also throws out important data. Plotted in the price pane, moving averages emit continuous "signal" without noise.

Apply the convergence-divergence technical tool to this visual analysis. Since price always moves toward or away from an underlying average, each new bar or candle uncovers characteristics of momentum, trend and time. And the skilled trader can access even more powerful information. Add multiple moving averages into the chart and a complete multi-time frame trend system appears.

Tie multiple moving averages together through any general mathematical relationship. One classic combination utilizes 18, 50 and 150 periods. Note that each MA approximates three times the preceding one. This particular set also builds an effective framework to investigate and trade three distinct periods of trend: short, intermediate and long-term.

Moving average sets create layers of convergence-divergence feedback. Instead of price alone moving toward or away from any average, the averages now move toward and away from each other. Whole trading systems can be designed that capitalize upon these relationships. The author’s Dip Trip, Elder’s Triple Screen and Raschke’s 3-10 Divergence all capture elements of these complex interactions.

But don’t stop at just two or three averages. Trending stocks emit fractals of price movement unique for each issue. Measure one of these fingerprints by the depth a stock corrects after each impulse of a trend. Instead than using complex math to locate these important pivots, traders can construct a Moving Average Rainbow. MARs consist of major averages, from the shortest to the longest, all interacting on the same price chart.

Rainbows reveal important and subtle relationships between price, time and trend. One of the most exciting discoveries uncovers how certain moving averages develop support and resistance behavior with other ones. This trait alone provides the trader with a powerful advantage over the competition.

vtss.gif (10578 bytes)
Moving Average Rainbows automatically locate hidden support and resistance unique to the trading vehicle and underlying trend. During this bull move in VTSS, the MARs provided continuous feedback on the cycles of momentum carrying the stock upward.

 

Article contributed by The HARD Right Edge, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission.
 
 

 

 
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Last modified: April 02, 2001

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