Moving Average: 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 moving average is probably one of the oldest trading tools. It is used to smooth prices, dampening the distractions of daily 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.
Because the system waits for the close to compute signals instead of using intraday reversal points it is possible for markets to move considerably during the day, especially in markets that have no trading limits. For example, if you are in a short trade, the market could rise sharply, give you an MA buy signal and then gap sharply higher on the next day's open before your reversing order is executed. —Peter Aan, 1989Articles on Moving Averages
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