Moving Average Time Span

Moving Average can be constructed for any time period, whether a few days, several weeks, many months, or even years. The choice of length or time span is very important.

Moving Average can be constructed for any time period, whether a few days, several weeks, many months, or even years. The choice of length is very important. For example, if it is assumed that a complete bull and bear cycle lasts for 4 years, an Moving Average constructed over a time span longer than 48 months will not reflect the cycle at all. This is because it smoothes out all the fluctuations that take place during the period and will appear more or less as a straight line crossing through the middle of the data. On the other hand, a 5-day Moving Average will catch every minor move in the stock cycle and will be useless for the purpose of identifying the actual top and bottom of the overall cycle.

Only an MA that can catch the movement of the actual cycle will provide the optimum trade-off between lateness and oversensitivity.

The choice of Moving Average depends on the type of market trend that is to be identified: short, intermediate, or primary. Because different markets have different characteristics and the same markets go through different cyclic phenomena, there is no such thing as a perfect Moving Average. In recent years, extensive computer research has been done on the optimum MA time span. The conclusion from all sources is that there is no one perfect time span.

What may work extremely well in one market over one specific period of time is unlikely to be duplicated in the future. When we talk about choice of time span, we are really trying to identify an Moving Average that will work most of the time with a specific time frame, that is, short, intermediate, or long. Generally speaking, long-term time spans are less influenced by manipulation and knee-jerk random reactions to unexpected news than are short term ones. This is why long time spans usually give the best test results. Examples of a 40-week span. Research also shows that simple averages generally outperform weighted and exponential ones.

The important thing to remember is that an MA is one technical tool in the technical arsenal that is used with other techniques as part of the art of identifying trend reversals.