Question

Describe what is meant by a moving average and separately a trend line.
Discuss the relative benefits and disadvantages of using moving averages versus a trendline.

Answer 1

Moving average : moving average are one of the core indicators in technical analysis, and there are a variety of different versions. SMA is the easiest moving average to construct . It is simply the average price over the specified period. The average is called "moving " because it is plotted on the chart bar by bar, forming a line that moves along the chart as the average value changes.

Trend lines: it reveals the action of bulls and bears. Bottoms of declines show where bears stopped and bulls regained control of the market. Peaks of rallies show where bulls ran out of steam and bears gained control . A line connecting two nearby bottoms shows the lowest common denominator of bullish power . A line that connects two nearby tops shows the lowest common denominator of the power of bears . Those lines are called trendlines . Treders use them to identify trends.

Trend lines are comes under charts analysis and technical analysis if you study technical analysis and there are some indicators which defines the trends of market either market is going uptrend of downtrend.

Advantages of moving average:

1) Moving averages are used for forecasting goods or commodities with constant demand, where there is slight trend or seasonality .

2) Moving average is useful to separate out random variation.

3) Moving average method is easy to understand and compute.

4) Moving average gives constant forecasts.

Disadvantages of moving average:  

1) it is necessary to maintain history of different time periods for each forecasted period.

2) Moving average overlooks complex relationships mentioned in the data.

3) The disadvantage of moving average method is that, it does not respond to the fluctuations that take place for a reason, for example cycles and seasonal impacts.

I hope this would be helpful for you

Thanks a lot