Moving Average Forecasting Model - Case Study Example

MOVING AVERAGE FORECASTING MODEL

Introduction

The moving average forecasting model is also referred to as the running average forecasting model. The model is proved important when smoothing the time series data and when coming up with a specific trend. The correlation that exists between the moving average of the security prices and the prices of those securities is a major boost for the financial managers to find the direction of the stock prices. A buy signal is normally generated when the prices of stock are normally above the moving average. On the other hand, the signals generated from selling the stocks are normally evaluated when the prices of stock is recorded below their moving average. The stock analysts and the managers uses various moving average periods to come up with the short term, long term, and the medium term trends for the movement of the stock prices. 10 day moving trend is used to determine the short-term price movement. On the other hand, th 100 day trend is used to find out the medium-term projections, while the 200 day trend is used to determine the long term of the stock prices.

The most common moving averages for analyzing the trends of the stock price includes the Trend Moving Average denoted as TMA and the Centered Moving Average denoted as CMA. The moving average of those trends are normally computed with the help of the past data. The CMA tends to reduce the reliance on the previous data. The centered moving average is calculated by finding the mean of the future and also the past data for a certain period of time. For purposes of this discussion, the 5 year stock data of Amazon.com, Wal-Mart Stores Inc, and Coca-Cola company will be analysed. The data then computed and plotted the TMA and the CMA of the three stocks based on their 10 day,100 day and 200 day stock price movement.

The graphical representation of the moving average for the three companies are as shown below.

The graph above shows the Trend Moving Average and Centered Moving Average for Coca-Cola company’s stock prices for the past five years. The results shows that the stock price signal for the company is on a rising trend. The ten day TMA is quite intermittent compared to the other indicators.

The graph above shows the Trend Moving Average and Centered Moving Average for Walmart company’s stock prices for the past five years. The results shows that the stock price signal for the company is on a rising trend. The ten day TMA is quite intermittent compared to the other indicators.

The graph above shows the Trend Moving Average and Centered Moving Average for Amazon company’s stock prices for the past five years. The results shows that the stock price signal for the company is on a rising trend. The ten day TMA is quite intermittent compared to the other indicators.

Comparing the two moving average, the Trend Moving Average, is calculated by finding the sum of all the stock prices within a specific tim and divide them by the number of days within that period. On the other hand, the centered moving average, considered thr stock pricing and their time into consideration. Most of the weight is placed at the middle of the time series. The chart above provides the moving average forecasting model for three companies. The three companies include Coca-cola, Walmart, and Amazon. Over the five year period; 2011 to 2016, the stock price for Coca-Cola has moved from $26 to $41, the stock price for Walmart has moved from $46 to $71, while the stock price of Amazon has moved from $184 to $789. This shows that over the five year period, the company experienced an upward trend in their stock prices. Which is a good thing for the company. The positive trend was experienced both for the Trend Moving Average and the Centered Moving Average. There was no significance difference recordings between the Centered Moving Average and the Trending Moving Average. This is because from the graphical representations submitted above, the three companies recorded an upward trend in both the TMA and CMA.

The analysis of Trend Moving Average and the Centered Moving Average shows that if stock analysts predict their stock prices using the 10 day, 100 day, or even 200 day period, the defined moving average are deemed free of seasonality. This is because the moving averages always entails an observation each period of the year; 10 day, 100 days, and also 200 days. Using the ten day period, the first value computed for the series would be the average stock prices for the period 1 to Period 10. The second value would be for the period 2 to period11 in that order. Using the one hundred day period, the first value computed for the series would be the average stock prices for the period 1 to Period 100. The second value would be for the period 2 to period 101 in that order. The same applies to the two hundred day period. This applies to whole the values for the three companies. Similarly, the centered moving average for the stock prices of the three companies are computed by finding the center between the first and the tenth price for the ten days, 1st and the 100th price for one hundred days, and 1st and 200th price for the two hundred days.

Moving averages having different timing provides various information to the stock analysts. A longer moving average like 200 days serves as a smoothing device for stock analysts when they want to assess the long term trends. A shorter moving average like ten and one hundred days will follow the action of prices and will frequently be used to come up with a short term trade signals that stock analysts will use to come up with projections. The moving average tends to serve as both resistance resistors and support for the stock analysts. In addition, they are are normally used as price target and key level for the investors. The moving averages provides the trading signals for the investors by providing the potential indicators for coming up with the price levels. Assuming that the price is above the moving average, the stock analysts will conclude the price to have a stronger support level. Meaning that, assuming that the stock analyst realizes the decline, the price will have a difficult time to fall belwo the price level of the moving average. Alternatively, assuming that the price happens to be below the moving average, the stock analysts will conclude that there is a strong resistance level. The moving average, will therefore help the stock analyst to know if the trend of stock price and their impact on the future stock performance trend.