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