Mov Avg Bands

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Mov Avg - Bands

Mov Avg - Bands are a convenient method of drawing a price channel based on the simple moving average indicator. This price channel is also commonly referred to as an "percentage envelope".

Prices can move up and down in the form of trends, but they also often bounce up and down in a horizontal manner. These short-term price movements define a channel and are known as consolidations. Unless there is a clear reversal out of the trend, prices tend to bounce off the upper and lower edges of the channel. A well-defined channel sets the boundaries beyond which the price does not usually move. Adding channels to charts will help identify instances of over or under-priced trades.

The price will generally return to the channel after penetrating the upper or lower edge. In addition, once it touches one side of the channel it will, unless there is a major change in the trend, move back to the other side.

The purpose of channels is that they provide you with an indicator of the stock’s ‘normal’ price movements. That is, its standard volatility. This should help you to ignore the smaller wiggles in its movement and instead concentrate on the larger picture. However, it is important to wait for confirmation that the price is moving well above or below the channel before making a trade as it can often just penetrate and then return.

Your SOFTWARE has capability to display a channel on either side of a simple moving average using the Moving Average Bands indicator.

Compare with Simple Moving Average

The Mov Avg - Bands indicator uses the same calculation as the simple moving average, but it creates two lines, one of which is a certain percentage smaller, the other a certain percentage greater, than the simple moving average:

movavbandlines.gif

In this example there are two Mov Avg - Bands (solid blue), each plotted 5% above and below the mean simple moving average line (dotted yellow). All three lines are plotted using 21 interval and are, except for the 5% displacement above and below the mean, identical.

Each band can be set at a different offset, but traders will generally set them at the same percentage, or very similar distances, so that the channel formed by the two lines remains faithful to the underlying simple moving average plot.

Note how excessively volatile prices move outside of the channel and later return, this phenomena is explained in the paragraphs above.

User Settings

The Parameters tab of the Mov Avg - Bands Properties dialog box has the following user.

Period for Averaging

The user can set the number of previous intervals that will be averaged with the current interval to produce the moving average for a given interval. This setting, and its effect, is the same as for the Mov Avg - Simple indicator.

Data Field

Most traders prefer to calculate the moving average using the Close data field. This is the default setting. However it is possible to choose other data fields from the drop-down list, the choices include: Open, High, Low, Close, Bid, Ask, Volume and Open Interest.

Top Percent / Bottom Percent

Enter the percentage by which the plot will be moved above or below the simple moving average mean line.

Users can set a different value for either line, but can will distort the channel. Traders will generally set them at the same percentage.

As a general rule, use a smaller percentage for a smaller averaging period and a larger percentage for a greater period, for instance use 3% for a 21 day moving average, 5% for a 10 week average, 10% for a 40 week, etc.

Note - While the percentage displacement of the bands can vary, but both bands are always calculated using the same Period and Data Field and therefore are always parallel.

Display

Like the simple moving average, the bands are overlaid on the price chart.

The exact display of the bands is controlled on the Plots tabbed page of the Mov Avg - Bands Properties dialog box.

movavbandselct.png

The display settings for each band are independently set. First select either MA Lower Band or MA Upper Band from the drop-down menu (right). Make the display adjustments for one, then select the other and make the adjustments for it.

The Style selected for each band can be one of the following: Solid, Dashes, Dots, or Points.

Once the style is selected the Color, Weighting and Visibility for each band can also be controlled from this page.

The Scale's display for both bands is controlled from the Scale Settings and Scale Appearance tabbed pages.

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