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In this lecture, we're going to discuss one very popular application of the simple moving average.

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While it might seem surprising that the absolute simplest concepts from this section can be applied

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to algorithmic trading.

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It's true, although algorithmic trading won't be taught in this course.

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I think it's a fun application and you'll see that this technique actually appears to make a lot of

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sense.

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So the key idea with this method is to have two simple moving averages.

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We call one the fastest in and one the slow Esmay.

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The algorithm works like this whenever the fastest time crosses, the slowest to move from above.

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We use that as a signal to take a short position or to sell in the case where you don't allow short

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selling whenever the fastest time crosses, the slowest come from below.

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We use that as a signal to take a long position or to buy.

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So let's take a look at a stock price time series, along with the fast and slow Assam's to make sure

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that this method actually makes sense.

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OK, so in this graphic, the fastest form is denoted by Orange and the slow Assamese denoted by green,

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the original close price is blue.

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So we see that in the first part when Orange Cross is green from above.

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This is when the stock price falls.

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So it makes sense to sell at this point.

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In the second part, when orange crosses green from below.

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This is when the stock price rises.

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So it makes sense to buy at this point.

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Here's another example of a sell signal.

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Note that this can perform poorly because the estimate lags the true price.

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It's also important to optimize your window sizes, which I haven't done in any case.

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Here's another example of a busy signal.

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So generally we see that this strategy makes sense.

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So when things are going down and buy, when things are going up, not bad for the simplest technique

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from the section.