Tools and Definitions

A computer is essential to analyse the information required for this trading system. We aim to use free software where possible however some traders will prefer to use some additional resources.

The system uses the interaction of the share price itself and a series of moving averages to define when we buy or sell a share. Here are some basic definitions that we will use later.

Closing Price: This is the price that a share is last traded at on any particular day. Conventional wisdom considers the last price of the day to be the consensus of the professional traders dealing in million of dollars rather than thousands.

Volume: The number of shares traded on an average day. The volume and price combine to help us establish the share’s liquidity which is how much money turns over trading that share each day. This in turn determines how easy it is for us to buy and sell the share when we want to.

Moving Average: A moving average is simply the average of the share price of the last number of days or weeks. So a 3 week moving average would be the average share price of the last 3 weeks. It generally is based on whatever price the share closed at on each day in the last 3 weeks. There are several variations of the moving average (simple, weighted and exponential) and for the rest of this article, we will refer to the exponential moving average which is a way of calculating the average giving higher weighting to the more recent days.

Multiple Moving Averages (MMA): We plot several moving averages of varying lengths to give us a very visual idea of what the trend is for a share.

Rate of Change: The rate of change is the rate at which the closing price is growing over a certain time. For example a share that was $1 six months ago and that is now $1.50 would have a rate of change of 50% for that six months. It is common to refer to an annual rate so you could say the share has an annual rate of 100%. Rate of change does not predict the future but tells you what the share has been doing in the recent past.

We recommend Incredible Charts which is available freely online from www.incrediblecharts.com but requires a monthly fee if you want to receive hourly updates. The free version uses 18 hour delayed data.