Moving Average

The moving average is one of the oldest and most popular tools used by technicians. Its strength is as a trend-following device which offers the technician the ability to catch major moves. Thus, it is utilized most effectively in trending markets. However, since moving averages are lagging indicators they can catch a trend only after it has turned.

Moving averages can provide objective strategies with clearly defined trading rules. Many of the computerized technical trading systems are underpinned on moving averages. How can moving averages be used? The answer to this is as varied as there are different trading styles and philosophies. Some of the more prevalent uses of the moving average include:

1. Comparing the price versus the moving averages as a trend indicator. For instance, a good gauge to see if a market is in an intermediateterm uptrend could be that prices have to be above the 65-day moving average. For a longer-term uptrend prices would have to be higher than the 40-week moving average.
2. Using the moving average as support or resistance levels. A close above the specified moving average would be bullish. A close below the moving average would be bearish.
3. Monitoring the moving average band (also known as envelopes). These bands are a certain percentage above or below the moving average and can serve as support or resistance.
4. Watching the slope of the moving average. For instance, if the moving average levels off or declines after a period of a sustained rise, it may be a bearish signal. Drawing trendlines on the moving averages is a simple method of monitoring their slope.
5. Trading with a dual moving average system.

GBU ^.^

source : Nison, Steve. Japanese candlestick charting techniques : a contemporary guide to the ancient investment technique of the Far East / Steve Nison.