Moving Average Crossovers
There are two moving averages over the price of the security. 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 (e.g., 20 periods). The periods may be 5 minute, 15 minute or
daily time frames. I use moving averages and crossing moving averages in my
intra day trading as well as in my short term trading.
There are three popular types of moving averages: simple (also referred to
as arithmetic), exponential, and weighted. The only significant difference
between the various types of moving averages is the weight assigned to the
most recent data. Simple moving averages apply equal weight to the prices.
Exponential and weighted averages apply more weight to recent prices.
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. When the shorter-term average crosses
below the longer-term average from above, this is a sell signal.
Moving averages are used to smooth prices, dampening the distractions of
short price movement so that the underlying trend is clearer. Moving
averages always lag the market and, therefore, will never buy market
bottoms or sell market tops. Like any other trend-following system, the
moving average crossover will perform best when markets are trending
because it automatically places the trader on the right side of every
extended move. When markets are moving sideways, however, the lack of
extended moves will cause losses.
When they work, the profits in the trades can make up for many small losses.
The Moving averages that you are looking at are 5 and 20 period exponential
moving averages on 60-minute bars.
Let's look at Galileo Technology, (NASDAQ: GALT) over the past few weeks
using this method.
Over much of the past month, following the moving average crossover method
and staying in market either long or short with the signal would have
produced some very good signals.
While being short from late August, GALT gave a Buy signal on September 9.
This stayed in place until the gap down on Monday, September 21.
I am not sure what caused this drop, but GALT has now signaled another Buy
today, September 22, 1999.
I would Buy GALT here.
I would place a stop at 28 7/8.
