Average stock price over the past N days
... and plot it.We might also compute the average price over the past M days
... and plot it.When they cross we BUY ... or maybe we SELLdepending upon whether the crossing is from above or below It might look like so: So we play with the numbers M and N until we're happy.
Of course, a
where
Note that we are assuming that P
Okay, what's
As you might imagine, there's a magic formula for this sum, namely:
1 + 2 + 3 + ... + 200 = 200*201/2 so that's the value for
In general, for an
Our
Note that the number K is chosen so that, in the case where all Prices
are equal, the Moving Average is equal to that Price as well.It's time for a picture (where we use the weights 1, 2, 3, ...):
Weighted Moving Averages; we pick our weights as
the periods of oscillation of a butterfly wing and we've got ourself
another WMA. Most play with just the stock price and ignore
the volume of stock traded at that price.
If today's closing price is $16 and last month it closed at $12, then is today's
price more significant ... because it's more recent (hence more relevant)?
I don't think so, not if only ten shares traded at $16 whereas ten million
traded last month at $12. (Okay, I exaggerate, but you get
the idea, no?) That brings us to my favourite (which we'll
call
It's simple.
Here's a stock and the volume of trades: The trading price in May was really important ... look at the volume! Anyway, we plot the weighted moving average over, say N = 100 days (why not?) and get:
I'm getting ahead of myself. We see the stock price and the 100-day VMA in a lovely
blue and also the 5-day
Moving Average. (I hate to place too much stock ... uh, emphasis,
on the dynamics of the stock price; it's too finicky, too nervous,
too apt to spike-then-fall, too volatile
... so we use a fast moving average, like 5-day,
'cause it follows the stock price pretty closely and it's smooother, right?)
So what're the BUY/SELL signals?
When
For example, if we plot the difference OOPs! I've used the label VA for the Volume Weighted Average,
rather than VMA; sorry 'bout that.
And what're optimal choices for
So why do I like VMA (as opposed to the other jillion technical
indicators)?
Suppose there are just two traders, Buyers
and Sellers.
Suppose the stock price goes up
significantly from $16, then Buyer will sell
(in order to lock in his profits). This will drive the
price down,
so, as a
Suppose, on the other hand, the price
goes down significantly, then
Seller (she had previously sold to Buyer) will jump back in
cuz the stock is now cheap again. This will drive the
price up,
so, as a
The problem is, of course, to identify this price.
The best we can do is to compute the
VMA!
Well, almost. You see, the Of course, buy low and sell high is a good dictum, but low compared to what? High compared to what?
VMA, that's what!
Example:You start with, say $10K in CASH and $10K in some stock. Each time VMA_{100-day} says to BUY
you spend 50% of your Cash (cuz you'll want some left in case there's another BUY comin' up). Each time VMA_{100-day} says to SELL
you sell 50% of your Stock (cuz you'll want some left in case there's another SELL comin' up). How does your portfolio compare to the change in stock price?
So what did I choose for A = 4.5 and B = -1.5, and now that I have these numbers
(which are a characteristic of this stock over this
time period) I use them to give me
BUY and SELL signals
for the (near) future.
Oh, one more thing ...
It's convenient to know how close we are to a BUY
or a SELL. To this end we can, each day, determine the
stock price that
For a BUY we want
which requires:
P
Further, for a SELL we want
which requires:
P
That gives: where we BUY (or SELL) when the Stock Price is below (or above) these curves. You can see a SELL in July and a BUY in September and another SELL may be comin' up ...
What kind of stocks should we consider for VMA?I figure they should be: - Pretty volatile (so we can play the swings), like mebbe
- Expected to go up over the long haul (example)
Not too exciting (tho' the losses were less than Buy & Hold).
## How to choose A & B ?It's poor technique to choose numbersA, B, which have little
relation to the prices and volumes we're considering, so consider
choosing them as follows:
We'll SELL when the
(P
or, let's just say
We'll BUY when the
You understand that these percentages, 25% and 15%, are entirely up to us and are inextricably linked to our greed ... so let's call them GREEDY PERCENTAGES.
Anyway ... a picture is in order: Here we plot MA/VMA -1 and note when it's greater
or less than 25%. (Them's the red and
green lines, indicating
sell or buy)
OR, we could (as we did earlier) plot the stock price as well as the
prices that
When the Stock Price moves above the SELL line, we ... uh, sell and when it moves below the BUY line ... well, maybe it's better to look at it this way:
We plot the VMA and the
Uh ... did I mention we used a 200-day Volume-weighted Moving Average here? So, have I made a bundle using VMA?I'll let you know. (See VMA trial)
There's a spreadsheet to play with: Volume Weighted Averaging where the stock data is downloaded from an Internet site and you get to choose your greedy-percentages ... and whether it's 100-day or 157-day VMA and whether you spend ALL or
just 47% of your cash when you buy and,
when you sell you can sell just 23% of your
stock and ... well, you get the idea. PLAY WITH IT!
Should you lose money using VMA
I'll claim ignorance ... and this website will self destruct.Should you make money, I'll accept a small percentage. |

to be continued ... one-of-these-days