Moving Averages - One of the most widely used indicators for technical analysis is moving averages.

This indicator is price related in that when applied to a chart they make the price movements look smoother,
and show the trend in the market.

Moving averages calculate the price of a security over a specified period of time.

We use different time frames to calculate different moving averages for a security.

The most common moving averages are 3-9 day for short term, 14-24 day for medium term, 50-100 day for intermediate term and 100-200 day for long term moving averages.

The important thing to remember about moving averages is the time period used for calculating the moving average.

Using different time frames gives different results.

To find a profitable time period we can calculate the distance between two significant tops or bottoms to determine the security cycle.

If the security has a top every 4 days for example, we might use a 3 day moving average.

The length of the cycle, in this case 4 days, divided by 2, plus one day.

The moving average is usually plotted over a price chart.

The reason is because the most common way to use them is to compare the security price with it's moving average.

When the price cross it's moving average from down side a buy signal is generated. When the price crosses from up side a sell signal is generated.

As we can see from this chart, the moving average doesn't cross over at tops or bottoms. Therefore we cant use moving averages for getting into the market at bottoms, or out of the market at tops.

But, using the moving average helps us to be on the right side of the price trend.

When we use the cross over, as explained above, to interpret the moving average, extremely high and low prices can generate false buy or sell signals.

To minimise the risk of false signals we can use two or more moving averages, one short and one long.

When the short moving average crosses over the long from down side and both moving averages are in an up trend we have a buy signal.

When the short moving average crosses the long moving average from up side and both moving averages are in a down trend we have a sell signal.