Lecture 8: Technical Analysis - Moving averages

Question 1

A ?? is the average price of a security over a set amount of time.

Answer 1

A moving average is the average price of a security over a set amount of time.

Question 2

? Moving Averages (SMA):

• the most common method used to calculate the moving average of prices.
• It simply takes the ? of all of the past ? prices over the time period and divides the result by the number of prices used in the calculation.

Answer 2

Simple Moving Averages (SMA):

• the most common method used to calculate the moving average of prices.
• It simply takes the sum of all of the past closing prices over the time period and divides the result by the number of prices used in the calculation.

Question 3

The shorter the period used to calculate SMA, the ? variation and the ? it fits with the actual price movement.

Answer 3

The shorter the period used to calculate SMA, the greater variation and the better it fits with the actual price movement.

Question 4

If actual price data cuts and moves below SMA, it’s a signal to ?.
If actual price cuts from below and move up SMA, it’s a signal to ?.
However, because price has already fallen/risen, this is a ‘?’ signal.

Answer 4

If actual price data cuts and moves below MA, it’s a signal to sell.
If actual price cuts from below and move up MA, it’s a signal to buy.
However, because price has already fallen/risen, this is a ‘lagged’ signal.

Question 5

The longer the period used to calculate SMA, the ? the lag between actual and SMA.

Answer 5

The longer the period used to calculate MA, the bigger the lag between actual and MA.

Question 6

‘Crossover’:
If the short-run MA cuts the long-run MA from below => ? signal.
If the short-run MA cuts the long-run MA from above => ? signal.

Answer 6

‘Crossover’:
If the short-run MA cuts the long-run MA from below => buying signal.
If the short-run MA cuts the long-run MA from above => selling signal.

Question 7

’?’: when short-run MA cuts long-run MA and quickly reverse after a short period of time
=> if we follow the buy/sell signal of whipsaw, => ?transaction costs.

Answer 7

‘Whipsaw’: when short-run MA cuts long-run MA and quickly reverse after a short period of time
=> if we follow the buy/sell signal of whipsaw, => high transaction costs.

Question 8

Empirical evidence suggests that Technical analysis is usually used in the ?-run to generate buy/sell signal.

Answer 8

Empirical evidence suggests that Technical analysis is usually used in the short-run to generate buy/sell signal.