Every trader has used a moving average (ma) at one time or another for a trading strategy. While ma’s are helpful they are not helpful all the time. The reason why they are not helpful all the time is because they are just an average. For instance, let’s say there are four people in the room and the salary breakdown is:
Person 1 – 20K
Person 2 – 20K
Person 3 – 25K
Person 4 – 25K
The salary average for the four people would be (20+20+25+25) / 4 = 22.5K. This would be a good ma because there are no outliers. Now say a fifth person enters the room with a salary of 100K (the outlier). The average changes drastically:
(20+20+25+25+100) \ 5 = 38K.
So what is my point? My point is, extreme volatility and outliers are the same. Assume you are using a 30MA. You wait fifteen minutes after the opening bell to avoid the extreme volatility before entering the market. Thus you enter at 8:45am Central Time. But, by using the above logic and using a 30MA, the 30MA isn’t trustworthy until 9:15am because you don’t want to include “open bell” volatility in your average. Thus, when using a ma for trading always consider if there are outliers included in the period you are using, if so, take that into consideration.