Levels and zones
Moving averages as moving levels
In a trend, price often pulls back to a moving average, which traders treat as dynamic support or resistance.
Some studies find something and others do not, or the result depends on the exact rule.
Moving-average and range-break rules looked strong in old stock data, did not hold up out of sample in the following decade, and stopped working in currency data by the early 1990s in one large study. A later study of 30 currencies over 45 years reports continued predictability. The debate is not settled. The specific idea of a pullback to an average acting as support was not found tested.
What it is
A moving average is the average of the last N closes. Common settings include 8, 21, 50 and 200. They lag price, so they describe a trend that is already under way.
What it suggests
As a filter, a moving average tells which side of its average price sits on. As a level, it is the same idea as a sloped line.
How to check it
State the settings in the plan and use the same ones every time.
Common mistakes
- Changing the period until the past looks good.
- Using it in a range where it whipsaws.
How we will test it
On public price history, never on anyone's account. Until it is done, the note above is all we can honestly say.
- Cases: price closing within a small distance of the 21-period average in a trend
- Measure: share of touches that hold versus close through it
- Window: next 10 bars
- Compared with: touches of a random line at the same distance
Sources
- Sullivan, Timmermann and White (1999), Data-snooping, technical trading rule performance, and the bootstrap, Journal of Finance 54(5) (citation and headline finding only)
- Neely, Weller and Ulrich (2009), The adaptive markets hypothesis: evidence from the foreign exchange market, Journal of Financial and Quantitative Analysis 44(2) (citation and headline finding only)
- Hsu, Taylor and Wang (2016), Technical trading: is it still beating the foreign exchange market? Journal of International Economics 102 (abstract or primary page read)
- Park and Irwin (2007), What do we know about the profitability of technical analysis? Journal of Economic Surveys 21(4) (abstract or primary page read)
Related lessons
Written in our own words. Education only, not financial advice.