How can moving averages work as s/r?

Discussion in 'Technical Analysis' started by Jaken, Sep 8, 2007.

  1. Jaken


    Although i'm not an advocate for technical indicators - i more like to trade with pure price action - i wondered how moving averages can serve as support or resistance? I mean, conventional tops/or bottoms are serving as s/r, because buyers or sellers expect price to stop there, or because of the breakeven thing :)
    But what about mas? Everybody uses a different ma, but still it CAN BE A BASIS FOR S/R. Why? How would a technician explain this phenomenon? I want to get in touch with the background/theory, not just that they work. This makes it much easier to trade them and to apply them and incorporate into your approach.
    Is there any theory which could provide a basis?
    This is bothering me for long, and i'm curious about your inputs.
  2. plodder


    You said it, people use different mas. If the market drops and holds at a certain price the commentators slap some mas on the chart then announce which ma it held at. Look at, sometimes they mention support at 50 ma, sometimes 200 ema, other times 200 sma. Easy, aint it?

    Same is true for fib retracements. There are so many possible fib numbers that when the market moves you just slap some fans on the chart and see which one is closest to the price.

    That's all it is.
  3. Spunky


    Not so, there is more to moving averages than that. By doing a lot of homework and using several moving averages, and observing the order of the moving averages, one can determine the long term trend, the intermediate trend and the short term trend and also by mathematics, one can determine the support and resistance for that timeframe. If price is close enough to support to give a 1:3 risk to reward ratio and waiting on a buy signal, the odds for success is in the trader’s corner.
  4. Jaken


    yeah, i'm somewhat confused. That prices usually have to come back to mas is logic, because it's the median price, but that the median should provide sup/res is everything than logic. Maybe some more senior traders will pop in.
  5. maxforce


    My take is that it is average. And this average somehow translate into people's mind as cheap or expensive.
    Say that the market has begun to trend. Then there is a small pullback to the MA. In people's mind, it translates into - cheap entry.
    Hope this is what you re looking for.
  6. This is just a guess, not a hypothesis.

    Mr. Market maintains 2 portfolios. An Investment Portfolio, IP, on margin, using a 25 days dollar cost averaging strategy. He sells the oldest buy to lock in profit and get cash, then buys back. Another is the Target Portfolio, TP, using the short against portfolios strategy. When price reaches his target gain he sells short, when price comes down near his IP average cost he covers it. He is a big player, when he sells price comes down, when he buys price goes up. He goes long for a period of time, when he feels that his IP average cost is too high he covers his short by his IP, and begins to "buy to open" a "put position" into his IP. When price reaches his target gain he buys against his put. When price comes up near his IP average cost he sells it. When other participants begin to act at his target he changes his target or the number of days of his IP.

    Mr. Market may be a real man or mechanism.

    Traders have to find the best suited moving average and the target gain and adjust as needed. Remember Mr. Market is dynamic.