Moving Average Crossovers
Moving averages are one of the oldest and most popular technical analysis
tools.
A moving average is the average price of a security at a given time. When
calculating a moving average, you specify the time span to calculate the
average price for X number of periods. For example, 20 periods. These
periods may be 5 minute bars, 15 minute bars, 60 minute or daily bars).
The classic interpretation of a moving average is to use it to observe
changes in prices. Investors typically buy when a security's price rises
above its moving average and sell when the price falls below its moving
average.
The moving average crossover method calculates two moving averages, each
based on a different number of periods of trading data. When the
shorter-term (fewer days) average crosses above the longer-term average from
below, this is a buy signal for tomorrow's open. When the shorter-term
average crosses below the longer-term average from above, this is a sell
signal for tomorrow's open.
The current charts we are using calculate a 5-period and a 20-period
exponential MA of the closing prices on 60 minute bars. If the 5-period MA
crosses above (becomes greater than) the 20-period MA, you would buy the
next bars opening because the system is saying that an uptrend has begun.
You maintain this long position as long as the 5-period MA is greater than
the 20-period MA. When the 5-period MA crosses below the 20-period MA, the
trend is now down and you would liquidate your long position and establish a
new short position on the next bars open.
Let’s look at Nokia Corp. (NYSE: NOK).
One of the easiest technical indicators a trader can use is moving averages.
Although they can seem a little slow at times, they will always keep you the
correct side of a major move and can even pinpoint some trend reversals.
Recently, the telecommunication stocks have been hit hard.
There is some fundamental information coming out that is explaining the
slowdown in many of these stocks.
By using our moving average crossover method, some large gains could have
been made.
This example in NOK, shows how moving averages would have moved a trader
out of the
stock, and possibly into a short position for NOK, during this decline.
For those looking for an opportunity to get back into a stock in a down
trend, the moving average method can be the trigger.
There are often whipsaws as was seen in NOK early in June, but moving
averages will always have you on the right side of any big moves.
