Calculating Moving Average from Close and the Other Methods
5 February 2010 by Petr Houstecky Add a comment
Topics: Macro Trading > Technical Analysis
Tags: moving average, time frame, trade entry, typical price
The common method: using closing prices
Most people calculate moving averages (or let their software calculate it) from the closing price of each bar. This has a valid reason on daily or weekly charts, because the price at which the market closes on a particular trading day or week has a big meaning.
Of course, like many things in trading, this meaning is partly self-fulfilling. Because everybody else watches it, I should watch it too, as it has a potential to influence future market development.
For intraday charts closing prices are less significant
On the contrary, when you are using intraday charts and short time frames (for example 3 minute bars), the closing price of a particular bar is not that important. Who cares where the market was exactly at 10:24:00 (as opposed to 10:23:56), or where it “closed” at 10:27:00?
Furthermore, with the improvements in technology and speeding up the internet some people started using so called alternative time frames like tick charts (each bar represents a particular number of trades) or volume charts (each bar represents a particular number of shares or contracts traded). If you use these, the closing price of a particular bar has probably no meaning at all.
Other options for moving average calculation
For intraday charts, the high and low of each bar may give you a much more useful information than close. A common approach is calculating a kind of average from high and low (and sometimes also close or even open). This average is then used for calculating the moving average.
In sum, most common methods for calculating moving averages are calculating them from:
- close (by far the most popular)
- average of high and low = (H+L)/2
- average of high, low, and close, also called typical price = (H+L+C)/3
- average of open, high, low, and close = (O+H+L+C)/4
Which method to choose?
Which one is the best? It depends, like everything, on your own taste, your strategy, and your needs. However, in most markets the selection of one of these methods will most likely not be the most critical factor in your strategy. In most cases the length of moving average period influences the behaviour of the moving average much more than which price is used for its calculation.
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Tags: moving average, time frame, trade entry, typical price