Moving Average Uses Part II – The Moving Average Crossover
In a previous article “Moving Average Uses in Determine Trend & Entries “, I introduced readers to the most commonly used components of technical analysis, the simple moving average. A moving average is a running mean of the closing price of a stock over x number of time periods. The two most widely used averages, even by those who rarely look at price charts, are the 50day and 200day simple moving averages.
In that article I talked about two key strategies that harness the power of the moving average to help investors determine their entries and exits for stocks they are interested in. We looked at how the slope of the average itself can helps us stay in a stock even when price displays rather choppy trading action. It can also help us exit a stock by telling us when the dominant trend has come to an end.
We also discussed a price crossover strategy, where one uses the price-to-moving-average relationship to determine ideal entry and exit points for the stocks in one’s portfolio. I mentioned that one should buy a stock once it crosses the moving average from below, and sell the stock once it crosses the moving average from above. One can use short-term (10-day), medium-term (50-day) and longer-term (100-day) moving averages, depending on one’s determined holding period.
In this article I want to introduce what is perhaps the most common strategy involving the use of moving averages: the moving average crossover. In this strategy, one would use two different moving averages – a longer-term average and a shorter-term average – and apply them to a price chart. Strategic information is determined, as the name implies, whenever the two averages cross over each other and form our moving average crossover.
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