A moving average is an indicator that shows the average value of a security's price over a period of time. This type of Technical Event® occurs when a shorter and longer moving average cross each other. The supported crossovers are 21 crossing 50 (a short term signal) and 50 crossing 200 (a long term signal).
A bullish signal is generated when the shorter moving average crosses above the longer moving average. A bearish signal is generated when the shorter moving average crosses below the longer moving average.
These events are based on simple moving averages. A simple moving average is one where equal weight is given to each price over the calculation period. For example, a 21-day simple moving average is calculated by taking the sum of the last 21 days of a stock's close price and then dividing by 21. Other types of moving averages, which are not supported here, are weighted averages and exponentially smoothed averages.
Moving averages are lagging indicators because they use historical information. Using them as indicators will not get you in at the bottom and out at the top but will get you in and out somewhere in between.
They work best in trending price patterns, where an uptrend or downtrend is firmly in place.
Using a crossover moving average as an indicator is considered to be superior to the simple moving average because there are two smoothed series of prices which reduces the number of false signals.
Criteria that Support
Indicators that are well suited to working with moving averages include the MACD and Momentum.
Criteria that Refute
Moving averages do well in trending markets but they generate many false signals in choppy, sideways markets.
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