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Moving averages: understand the calculation before the crossover

Moving averages: understand the calculation before the crossover — Golden Bear Capital research

A simple moving average takes the arithmetic mean of prices over a chosen number of observations. If the last five closes are $10, $11, $12, $13 and $14, their sum is $60 and the five-period average is $12.

What moves the average

If the next close is $15, the oldest $10 observation drops out. The remaining values total $65, giving a new average of $13. The calculation follows recorded prices; it does not know tomorrow’s close.

An exponential moving average places more weight on recent observations. The precise weighting depends on the calculation. Check the platform’s definition and initialisation when comparing values across software.

A longer average smooths more observations and generally responds more slowly. That delay follows from its construction. It can make a chart easier to read while obscuring rapid changes.

Settings belong in the record

Write down the period, price field and chart interval. A 20-period average on daily closes differs from one on hourly closes. Adjusted and unadjusted historical prices can also generate different values.

Keep these settings consistent in your TC2000 chart configuration. Otherwise apparent disagreement between two screens may come from their inputs.

A crossover describes one calculated line passing another. Its occurrence does not establish profitability. To evaluate a rule based on it, you would need specified entries, exits, costs and a complete sample including sideways periods.

Calculate the five-period example by hand, then compare it with a spreadsheet. If you can reproduce the line, you can explain its delay and recognise when a chart setting has changed the comparison.

Sources and further reading

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