All language subtitles for 8. Dealing With Moving Average Limitations

Now, here's the deal with moving averages, they have limitations, they're very useful, but they're

not perfect.

You know, nothing's perfect, right?

But they can be used really in conjunction with other types of indicators as well as far as a really

good confirming type indicator or working as a parent.

And in some of these challenges, there are harder overcome than others.

So let's take a moment to talk about the limitations of this.

Good.

But let's talk about some limitations and some of the ways that we can overcome them.

We talked a little bit about filters of the subway moving average.

Let's talk about some other things we can look at as well.

Now, one of the limitations of moving averages in general is when markets go sideways right there.

You can almost see from the image there in the circle where it goes up and it goes down or up and down,

up and down.

And it's kind of go on the sideways thing versus a definite upward trend or a downward trend.

Moving averages are better that way.

They strike a little bit more when they're still trending or they're moving sideways, makes it harder

to predict the next move.

And that's where our whipsaws come in right there.

Frequent price changes above and below the crossover line, giving us different, you know, buy and

sell signals constantly.

So we might be forced to trade more often unless we filter that.

The value in a sideways move is you can recognize that is to recognize that's occurring and then adjust

or wait for a trend to appear.

Or you can use other tools with the moving average to identify actions to take likely can't support

resistance levels, different things of that nature, but understand that a moving average can be a

little bit more limited in a more sideways market.

If we look at this image here, you can see where there's a definite uptrend in the blue and a definite

downtrend in the right.

And then we see the sideways trend there in the middle where kind of is border between the two of the

top and the bottom on that.

And then you'll using things like our chart analysis, we can identify that that's a channel and we

can sell near the tops of this channel, for example, or we could be near the bottom of the channel.

This is our desistance and support line that you see that we've driven over the top of and above these

prices.

And then if we look at the moving average overlaid on top of that, maybe we could also look at to be

even more comfortable, we could say, well, we're going to sell near the top of the channel, expecting

it to come back down.

But and then when it comes back down, maybe we've sold at the top a channel.

But if we're not sure of the channel, we would certainly sell after it crosses that moving average

line.

And then as it gets more near the bottom that support level, then we might be near that bottom as opposed

to, you know, buying.

Or we could wait until we bought after it crossed the line again.

So you can kind of see where they can kind of work together, these different channels and moving averages.

And there's different times when you'd be buying or selling, whether you're moving quicker on something

like that or slower on something like that, depending on the channel and depending on the moving average.

Another limitation dealing with moving averages is noise, right?

If you have a disorderly charge, there's lots of outliers.

Right.

So it's kind of noisy.

Raoul Spikes or you have high prices, low prices.

It doesn't seem to be really very organized.

As far as a chart or a noisy chart.

You can give off more false buy and sell signals.

Right.

It's going above and below the line, whipsawing a lot.

It just seems to be all over the place.

And you can fix that by applying a moving average with more days in it.

You know, so so things that are these big outliers can get smoothed out more and become less of an

outlier because a longer time frame will actually smooth that out.

More than a shorter time frame.

However, a longer time frame will increase the lag a little bit more doesn't put as much emphasis on

more recent prices.

So with all these things, you have kind of a give and take around the too.

But if you're dealing with a chart that seems just real confusing highs, lows all over the place and

you want to try to get a feel for that moving average, try a longer time frame to give you a little

bit another way of looking at it, understanding, though, that it might increase the leg.

And then if we look at leg itself, that, of course, is a limitation and you could see a dramatic

price move and you could see potential profits, like look at where it went and when way down there

might be a way to buy in.

And and and then there might be a good opportunity here.

But you're let's say you're a disciplined investor, hopefully hard, disciplined investor.

And you said you want to wait a few days for that legging moving average to catch up and then actually

create the cross the crossover.

So you can see it kind of happening.

You see it kind of moving towards the line, you know, the moving average line, but you're waiting

for the crossover to happen to, which is your way of confirming and your way of making that decision

around that.

And if you put an extra filter on, it needs to cross the line by a two percent or three percent before

you actually make a decision, let's say, to buy, for example.

Meanwhile, while you're waiting for that kind of leg, you could be losing out on profits, waiting

for that to happen.

Now, the nice thing with technical analysis, you don't have to be perfect to be perfect every time.

But understand, there's an opportunity cost where you might be delaying to avoid the whipsaw and avoid

frequent trading.

But you're experiencing that leg now.

You can fix that by applying a moving average with less days in it, you know, so be more sensitive

that recent price or you put maybe more of a weighted moving average with less.

That is doubly sensitive to a more recent price, and so you're trying to reduce that leg a little bit

as far as your trading decisions go.

But if we look at some of those things, you can see the conflict.

I hope you saw the conflict there right away.

If not, let's talk about that.

You have noise and like.

Right and noise you fix by applying a moving average with more days in it and then letting you fix by

applying a moving average with less days in it.

So you can't play around it, especially as you learn certain securities.

What might work best for that particular security.

But you can see, you know, there's a yin and yang here.

You're you're giving up one, you're getting more of another.

So unfortunately, there's no magic number of days.

Right?

I wish there was a magic number.

I would say.

Well, the best number to reduce noise and leg at the same time is this number of days or a number of

periods, depending on your could be hours or minutes.

Let's say you're were a day trader, so there is no actual perfect one.

Summer might work better than others, but there's no perfect one.

You just have to adjust and understand, you know, noise and leg alternately.

Well, you could do is just focus on a security that's more orderly or an effect less noisy, has less

of these outliers and things.

So it's a little bit more early.

So if you have less noise, you can you know, you can kind of work on that leg, part a little bit

more and use a moving average with less days because the security is moving in a more orderly fashion.

So that's another way you could do it.

And then there's another option, which you can use multiple moving averages as a strategy.

We're going to talk that next year.

And also we're going to talk about that strategy where you're not looking at when the price crosses

over and dealing with the limitations.

You're going to look at moving averages cross over each other.

So let's take a look at that here in the next lesson.