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Using Moving Average Crossovers To Decrease Trading Risks

05/16/00 04:36:39 PM
by Jason K. Hutson

A crossover of two moving averages presents a possible trading opportunity.

Security:   SYMC
Position:   N/A

Moving averages are the averaged prices of a security for a specific period of time. For example, the last 12 closing prices for Symantec Corporation added together and divided by 12 would give today's 12-period moving average, and the last 24 closing prices divided by 24 would give today's 24-period moving average. Each day a new data point is plotted on the chart.

When the shorter, or faster, moving average crosses above the longer, or slower, moving average, the signal is considered a buy.

Moving average crossover indicates price consolidation. The shorter period moving average (12-day) price is higher than the longer period moving average (24-day) indicating that after the consolidation, prices are moving higher.
Graphic provided by: eSignal.
On the chart of SYMC notice that the price action for the 24-period moving average has slowly been catching up to the 12-period moving average. On May 12, 2000, the moving average price for the 12-period moving average exceeded the moving average price for the 24-period moving average, giving a buy signal at $59. Considering also that SYMC is in a trading range, see the article How to Profit From Trading Ranges, and the graph How to Profit From Trading Ranges, a trader must keep a close eye on the support and resistance levels of $50 and $70 respectively.

Trying to buy SYMC at any price under $60 at this point may be a good bargain because both moving averages have leveled off at that price level. By placing a stop order below $50 and making sure those moving averages do not both dip below $59 (moving average price support) an investor can enter a long trade with less risk.

Jason K. Hutson Staff Writer. Enjoys trendlines, support and resistance, moving averages, RSI, MACD, ADX, Bollinger bands, parabolic SAR, chart formations, and volume analysis.

Title: Industrial Engineer
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