Direct method (2) Price is not processed
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Serial Publication "Trading Philosophy" … 15
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If you throw garbage toward the trash can, it misses 30 centimeters to the left.
If you throw it again, this time it misses 30 centimeters to the right.
The reasoning that “on average, both should land right in the middle!” is not valid, right?
In stock price charts, the moving average line is one of the popular observation methods.
However, practitioners who believe that the direct method is correct deny moving averages.
What is yielded when averaging a past fixed period—what does it show?
A moving average is a line that goes through the middle of the zigzag rises and falls.
In short, that’s all there is to it.
Because it is merely a “line that passes through the middle,” one might wonder if there is any point in calculating it... this is the point where those who favor the direct method question things.
There is one more point about moving averages.
A simple question: “Trading is about thinking about the future, so is it okay to go back to the past?”
If stock prices rise and fall regularly, the discrepancy with the moving average becomes stable, but since it is inherently regular, there is no point in using the moving average.
There are opinions that “using moving averages helps detect extreme deviations in stock prices,” but when the divergence between the stock price and the moving average (the gap) lasts long in either the upward or downward direction, that is precisely the situation in which you should take a position in that direction to make a profit, or quickly cut losses in the opposite direction.
The idea that the fluctuating price movement is nicely smoothed makes it easier to understand the price trend, and cannot be denied.
Yet, as the data set increases beyond the stock price itself to include the moving average line and its deviation from the stock price, the complexity grows simply by having more data types.
Such a complex situation and the attitude of “trying to predict the future” become dangerous, and moreover, is it okay to overlook the contradiction that the time axis shifts backward while thinking about the future…
This is the logic by which moving averages are denied in the direct method.
