Constructing simple moving average crossover filters

Building the simple moving average

A simple moving average is constructed by averaging a fixed window of successive observations, then advancing that window by dropping the oldest observation and adding the newest. In this construction the simple moving average is an unweighted mean, and the lookback-span is the number of sampling intervals inside the window.

Centered-plot and noncentered-plot

A mathematically centered average belongs at the midpoint of its lookback and therefore cannot be known in real time until half of that lookback has elapsed. That centered-plot describes the completed window only after the delay.

Because of that delay, the same average is given a noncentered-plot at the latest observation. A price move through that line is treated as a trend-reversal hypothesis. The hypothesized trend change marked when price moves through the noncentered average is a moving-average-crossover.

Lookback-span by trend horizon

Shorter lookbacks produce earlier crossings near turning points and more false crossings in ranges. Longer lookbacks produce fewer, later crossings. A whipsaw is a crossing that reverses before a usable trend develops, and it is typical of a short lookback inside a range.

Lookbacks are grouped by trend horizon rather than fitted to a single market: multi-month spans for primary trends, multi-week spans for intermediate trends, and multi-day spans for short-term trends, always as a compromise between timeliness and sensitivity.

Reading a crossing as a filter

A crossing is treated as more credible when the average has repeatedly turned price without being pierced, functioning as a moving support or resistance zone. That repeated failure of price to pierce a still-valid average is dynamic-support-resistance, and the line is treated as a moving barrier until a decisive break.

Crossings of a relatively flat average are treated as more reliable than crossings of a steeply rising or falling average, because a steep average implies strong residual momentum.

Trendline-confirmation and the range-boundary-filter

A moving-average crossing that coincides with a trendline break supplies independent structural evidence that the same reversal is underway. That independently drawn price structure is trendline-confirmation.

Once repeated whipsaws mark a trading range, the average no longer acts as support or resistance. Range-boundary-filter lines then replace crossovers as the next-trend filter.