TECHNICAL ANALYSIS

After introduction to the chart types and major chart information, the subject now is moved from chart interpretation to the quantitative trading methods which provide more objective view of price activity. The tools of the quantitative trading methods are the moving averages (discussed in this subchapter) and the technical indicator is a result of mathematical calculations based on indications of price and/or volume. The values obtained are used to forecast possible price changes. Technical indicators can be categorized into three groups; line studies, volume indicators, and oscillators.
Moving averages

Moving averages are one of the oldest and most popular technical analysis tools. The moving average is an average price of a financial instrument over a given time period. As shown in figure 8, the line is smoother if longer time period is used. There are three types of moving averages:

1. Simple moving average (SMA).
2. Linearly weighted moving average (LWMA)
3. Exponential moving average (EMA)

The simple moving average is calculated by summing up the prices of instrument closure over a certain number of single periods:

Where N = the number of calculation periods.

Whereas the different with linearly weighted moving average is this type of moving average assigns more weight to the more recent closing prices while SMA use equal weight to each closing prices. For EMA, it also takes account of the previous price information in addition of assigning different weights to them. Traders can use different time period of moving average such as short-term, medium-term, and long-term periods.

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