High Period Moving Averages as Support/Resistance

Beginner Questions
1

Unless I’m mistaken, it is well established that high period moving averages can act as a representation of support and resistance levels.

If this is true, then the trick would be to determine what period (how many previous days) to use and where the MA is applied to (High, Low, Close, etc).

From what I’ve read, most people just use a large number, perhaps one that even encompasses the previous year, but ultimately choosing a number is a crap-shoot and would be logically different for each pair.

Additionally, the accuracy of these moving averages-as-support/resistance is limited to a specific window of time. That is to say if you some how found a moving average setting that strongly correlates with perceived support/resistance levels, then as soon as you switched to a different time window, the MA would lose accuracy with regard to the s/r levels.

This leaves me to wonder…

What would happen if someone used a brute-force computer program to apply a large number of varying Moving Averages and tallied how well each one correlated with previous s/r levels? I would guess that each Moving Average would be trivially ineffective with the exception of a few narrow ranges of MAs.

Once you compile a list of MAs that show a strong correlation to the s/r levels, then not only would they be fairly useful for technical analysis, but you could also look back and figure out why that specific MA is effective.

I imagine it would be interesting :slight_smile:

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Did this manually; the colored MA’s are the ones with noticeably higher conformity.

I used a range of 100 to 720 days in increments of 20 days; Some of the MAs are applied to highs (dark grey), some to lows (light grey), and for a few of them I chose linear weighted as the method (white) instead of exponential (grey).

The conformity of the colored MAs was apparent no matter how far back I went; the window I used was simply the most recent.

The five best Moving Averages were:
340 High, Exponential
340 Low, Exponential
140 High, Exponential
140 Low, Exponential
100 Low, Linear Weighted

I don’t know about you guys, but I find that interesting as hell.

Thoughts?

2

look at those charts again real hard, your probably missing something way more important than support and resistance

3

The chart is just an illustration of concept…

Unless you’re referring to a ‘deep’ relationship between what the MA represents and the points of conformity, then I’m at a loss as to what I might be missing.

Perhaps you’re referring to the fact that the MA as an indicator does not extend far enough passed the latest market update therefore it would not be effective as any form of prediction?

4

well i have looked at a simalar chart picture before and i thought about it and you know most people use MA’s crossing each other as a trading indicator , did you consider what the MA’s crossing the priceline signals ?

5

When the MAs cross over the priceline, it signals that the price is moving above the “average” or below the “average”. When the MA is of a short period, this can be sufficiently early enough confirmation of a trend.

Or am I way off? :frowning:

6

you could be right but i saw something a lot simpler,I saw a picture of that and i did like you i created my own to see what it would look like on my chart and after wondering how i could use it as a trade indicator i realised it was staring me in the face the whole time, if you simplify the logic behind most indicators, like the macd etc what they actually do is try to simulate the price action on one line while creating a signal with another line, what your looking at there is an indicator that doesnt simulate the price action, it IS the price action.

7

zoom out your chart so you can see when the last time the price crossed each MA

8

I see what you’re saying now.

I wasn’t exactly doing this to create a trading indicator, but rather as a means of understanding the relationship between previous price action and current price action.

Ultimately when I see moving averages that are based on the previous ~300+ bars that perfectly represent the limitations of current movement, then I’m itching to know why those specific moving averages do something that the others cannot.

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Why do those moving averages work as support/resistance, but other ones do not?

9

They don’t always work in that fashion.

Usually, and as you probably know, price is on one side or the other of the average. Using the averages, and the MA lengths in the fashion you are, you are seeing price finally cross the line from one side to the other.
Since the average you are using is a long period, that will of course take some time to do. Price will bounce around the average for a bit before ultimately staying below, or crossing to the high side.

With that being said, moving averages are easily the most useful tools in the shed. But the crosses of them don’t mean a thing.
Instead, SDC was almost spot on when he made the remark of price crossing the MA being the more valid signal.

10

I hope this is still related to discussion…

I noticed signal services, newspapers and other sources love to mention the 10-day MA. Is this some very important line that the big hands use?

Oh right, when they say MA, is it the SMA or EMA they mean :confused:

11

It’s generally a simple MA.