(comments from discussion on trade 5
http://www.mudraa.com/singlepost.php?messid=74251)
dear vishu,
no doubt sma is a lagging indicator.
but this is exactly its strength.
had it been not lagging, it would be of no use to us!
let me explain with an example.
let us consider sma14/30min on 1 month chart
what does this sma line represent?
it represents the average of last 14 readings of price each separated by 30 minutes.
14 readings x 30min = 7 hours
one trading day = approx 7 hours
so sma14/30min represents the trend of 1 day on moving basis.
when the price suddenly changes direction
sma doesn't change direction so fast
as it is a LAGGING indicator
and hence the price CUTS ACROSS the sma line
thus indicating a probable change in
market's mood
when compared to its behaviour over last 1 day or so.
this is a signal of the change in the very short-term trend!
with the confirmation from other indicators
profitable trading positions can be taken
all thanks to
the sma being
a LAGGING indicator
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