Pivot Point Moving Average System - Introduction

Pivot Point Moving Average System

The moving average is one of the most widely utilized indicators in technical analysis because the moving average is easily identifiable and easy to back-test. Many automated trading systems use moving averages or some derivative of a moving average to generate buy and sell signals. Moving averages are considered classic indicators and are very popular with traders today. Most technicians view the moving average as a way to signal a change in the direction of the trend, as well as a way to smooth out the volatility of the market. In Chapter 2, we covered a key component in understanding the concept of trend, which in essence gives you the ability to understand the concept of momentum. Remember this: “In a bullish environment, buying begets buying.” Higher closing highs bring higher highs as momentum and assigned values (the closes) are justified. The law of physics that states that “a body in motion tends to stay in motion until a force or obstacle stops or changes that motion” applies in this scenario because higher assigned values can induce more buying from existing buyers and can attract new buyers. Once again, the opposite is true of a bearish market: Lower closing lows bring lower lows as momentum and assigned values are justified. The lower assigned values induce more selling by existing sellers and can attract new sellers into the market.

When prices have appreciated and all buyers have exhausted their resources to add more long positions in a bull market, prices have reached what is known as absolute value. Prices will more than likely consolidate for a period of time before they change direction and reverse lower in value. The opposite is true in a down-trending market. An important component to remember is that price action typically moves from trend phase to congestion and can either continue with the original trend or reverse the trend. Momentum and the psychology of the perception of the value of a given market in a given time period are what will move prices from a consolidation, or congestion phase, back to a trending condition.