9 Overlap Indicators

This type of indicator could be regarded as describing the trend, but it is named here as “overlap”, meaning the indicator can be placed on the same scale as price, to use the same terms used in the Pandas technical indicators tool set.

They are primarely moving averages.

Basically, it is a rolling window, where the price at any given time is recalculated based on different ways to calculate an average of all values during a defined prior period.

For instance, a Single Moving Average (SMA) of 50, in a chart of daily data, means that the average is based on the mean value in the prior 50 days.

If the chart is displaying data in minutes, then MA(50) means the MA is based on the last 50 minutes of data.

The moving average basically removes the extreme values from the price trend. In other words, MA smooths out the trend in price.

Figure 9.1: Moving average

By taking a longer prior time period, this index allows to see the long-term trend in the stock price.

By using only a few prior periods, the index allows to see the short-term trend.

Prices always have to move toward the average. So any time a price is trading above average, then you can expect for the price to start going down.

When price is moving below average, then you an expect for the price to move up.

Figure 9.2: Moving average

Given that single truth…One can use the times when the short-term average crosses the long-term average to gain signals of trends…this is called “moving Average Crossover signals”.

When the short-term moving is above the long term mean and then crosses it, you can expect the price will start to move down…probably a good time to short the stock (red arrow in image above).

when the short-term MA is moving below long-term average and crosses above the long-term MA, you can expect the price will start to go up (blue arrow above) Probably a good time to buy stock, if you shorted it.