Moving averages or my term averages that move was first employed by hedge funds and central banks upon the 1972 free float. Sophisticated traders later adopted moving averages as a form of trading because interest and exchange rates began quoting as averages. Further, moving averages contain built in statistical components yet many types of calculations derive from a moving average. The derivation of numbers and which average to use in trading derived from ancient cultures long before Jesus Christ and represented as BC.
Today’s Arithmetic counting system is based on 0 to 9. This is 10 numbers and 5 is the middle number. The Hindu – Arabic number system derived today’s base 10 system. Today this is represented and termed the Geometric numeral system as 1, 10, 100’s, 1000’s, 10,000’s, 100,000’s. Notice the 5 multiple as the foundation but further note this Geometric system is where is derived the decimal system. Exchange and interest rates are based on the decimal system.
In the 6th century, a Hindu by the name Bahmagupta invented the numeral 0 and the Arabs spread this 0 to the western world. Arabs today term their number system Rakam-Al- Hind to represent the Hindu number system. The Mayans in the 4th century also adopted 0 yet again the Mayans only had 20 numbers to use as a counting system. Note again multiples of 5.
The Egyptians invented the Fraction system. They used 1 as the numerator. Thank the Egyptians for calculating today’s reciprocal exchange rates.
To read my Z Score book is to understand Biblical numbers and derivations. The Romans, Greeks and Israeli’s used numbers representative to their Alphabetic system and those numbers only contained about 20 numbers. Early counting systems matched numbers to symbols and the idea was to simplify. Again multiples of 5.
The number 5 is the foundational number to the modern world and its only natural markets were built on the number 5. Moving averages then should be built upon multiples of 5.
My moving average system contains averages as 5 days, 10, 20, 50, 100, 200 and 253 days. To account for holidays in every nation as well as actual trading days, 253 was factored as the average. New Zealand and the United States contains 253 yearly trading days. Further, 200 is an outlier number as a trading day therefore 253 was the numbered insight to 200.
A moving average factors overall to either a Standard Deviation or a logarithm. Logarithms are the percentages as EUR dropped 1%, 2% or rose 0.32%. Thanks to Karl Friedrich Gauss, Karl Pearson, Pierre Simon Laplace and Abraham De Moivre for giving the world the Standard Deviation, Correlation, Normal Distribution and Probabilities.
The trading world and moving averages begin with a Standard Deviation and 5 types of deviations exist as Standard Deviation, Standard Error, Standard Error of the Estimate, Mean average deviation and absolute deviations.
Deviations and moving averages spreads to Z Scores, T Scores, F Stats and Stanines. Stanines are Standard Nines and I believe its where Gann developed the Gann system of Nines. From deviations we go to Percentages, percentiles, Probabilities. Cumulative percentages.
From averages we to to Simple, Exponential, weighted, non weighted.
Correlations take calculations to R2. The BOE for example loves to calculate exchange rates by R2 and T Scores. They love to calculate Yield Curves by Variances.
Distribution of prices takes calculations to Standard normal curves, Degrees of Freedom, One and two Tailed distributions, Confidence intervals, Probabilities. and RHO.
Then we calculate Regression and Multiple Regressions. Regressions contain Residuals and the best chart on the planet.
A moving average is an old reliable indicator and contains many, many avenues to use in trading accurately. The key is choose your calculation and master it.