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 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-day and a 20-day exponential
MA of the closing prices. If the 5-day MA crosses above (becomes greater
than) the 20-day MA, you would buy tomorrow on the opening because the
system is saying that an uptrend has begun. You maintain this long position
as long as the 5-day MA is greater than the 20-day MA. When the 5-day MA
crosses below the 20-day MA, the trend is now down and you would liquidate
your long position and establish a new short position on the next day's
open.
Let’s look at Intel Corporation (NASDAQ:
INTC)
Yesterday I wrote, “Sometime in the near future, I expect INTC to give a
Buy
signal. Will this signal workout?
The lesson here is discipline. Do not try to pick tops or bottoms and have
a trading plan that uses stops.
Watch INTC, when the moving averages cross back over, I would consider a
reversal trade. Until then, the trend is down and short is the side of the
market to be on in INTC.”
Today, September 19, 2000, we had a Buy signal.
I would be long INTC here.
I would place my stop at 58 �.
There are many other large cap companies with similar patterns. Wait for a
signal to buy. When you do Buy, please use stops.
