Moving Average Deviation: Contrarian Signals and Context
Summary
The article explains deviation rate, or the percentage distance between a share price and its moving average. It presents the measure as a contrarian tool: a deeply negative reading may indicate that selling pressure is exhausted and a rebound is possible, while a large positive reading may reflect substantial unrealized gains and increased profit-taking pressure. The rationale is based on investor psychology and the moving average as a proxy for average holding cost.
It recommends a ten-day average as a practical lookback and offers specific entry and reduction thresholds, while cautioning that a commonly observed negative deviation can be breached before a rebound. The suggested levels are presented as rules of thumb rather than results from a documented test. The article also says outcomes may vary with share liquidity, price area, and company performance: it expects the measure to behave differently in heavily controlled or speculative shares than in larger, lower-priced shares. It provides no systematic performance data, transaction-cost analysis, or broader risk controls, so its thresholds should not be treated as universally reliable.
Key ideas
- Deviation rate measures the percentage gap between a share price and its moving average.
- The article links large positive and negative deviations to investor profit-taking and reluctance to sell at a loss, respectively.
- It proposes a ten-day moving average and gives contrarian entry and reduction levels as rules of thumb.
- A negative deviation can extend beyond a suggested entry level before a rebound occurs.
- The article argues that share size, trading area, and company performance affect how the indicator behaves.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.