Moving averages are important components of many technical indicators. The Endpoint Moving Average (EPMA) is a popular method of plotting a line that uses linear regression instead of averages, which reduces the noise of market price activity and can reveal or follow trends. Compared to a simple moving average, this method hews more closely to data and lags less.
A moving average line averages prices in a given time period (such as the 30 days leading up to each day), and plots that point on a chart; when connected, the collection of points becomes the moving average line.
A linear regression line, however, plots a line with a slope for each 30-day period. Linear regressions are basically averages that use formulas with independent variables to predict outcomes. The EPMA uses the endpoint of the sloped regression line as the plot point for each day. Because it picks up the end of the sloped line for each time interval included, it is more representative of present trends than a simple moving average line – the SMA lag referenced above. Channel lines above and below the regression line can also be used as support and resistance indicators.
The EPMA is used to calculate the Inertia Indicator, which represents the amount of momentum or resistance to change a trend. Exponential Moving Averages (EMAs) use the closing prices of all the previous trading days in the interval being used and get an average price from that for the period, but it is weighted to give the most recent days more influence over the final number. The weighted averages are plotted in a line that helps traders follow trends. Both of these methods are more prone to whipsaws, however, than lagging indicators.
Most moving average indicators will plot two or more lines of different time intervals to indicate slower and faster movements, and the crossovers they experience may be treated as signals. These include two basics: the Golden Cross and the Death Cross. The Golden Cross refers to a breakout candlestick pattern when the short term 50-day moving average for a security exceeds its long term 200-day average, backed by high trading volumes. Investors typically interpret this crossover as a harbinger of a bull market, and its impact can reverberate throughout index sectors.
The Death Cross is a chart pattern indicating when a security’s short-term moving average crosses underneath its long-term counterpart, typically followed by an increase in trading volume. Investors use a death cross, the inverse of a golden cross, as a tool to identify incoming bear markets, most commonly using long-term 50-day and 200-day moving averages to detect the pattern.
The EPMA is one of many indicators that make up technical analysis in trading. Which indicator or methodology a trader decides to use usually depends on their experience, skillset, and the quality of the tools (including artificial intelligence with Tickeron) available to help them find trade ideas.