Moving averages are one of the simplest and the most popular technical indicators that can be used in any market. While using averages, the length of time used to calculate them is very important. Moving averages with shorter time periods fluctuate more activley and tend to give more trading signals. Shorter time period moving averages tend to whipsaw a lot that can cause losses. Moving averages can be simple, weighted or exponential. In case of simple, all the prices are treated equally whereas in the weighted and the exponential averages, recent prices are given more weight so that these averages are more responsive to the recent prices as compared to the old ones. These averages tend to smooth out the price action that is more easy to interpret and understand. Now, longer time period averages tend to move slowly and have a long curve that makes them slow in giving trading signals. Traders use a combination of slow and fast averages in trading. A trading signal is generated when the two cross each other and hence the name crossovers. Many traders use a combination of three averages like the 4, 9 and 18 period. When the short moving average crosses the medim one this generates a trading signal. Now this trading signal is confirmed when both the short and the medium move above the longer period average. Stock traders tend to move longer periods like the 40 day, 100 day and 200 day averages to determine whether the stock is bullish or bearish. Now next to trendlines, moving averages are the most widely used technical indicators. So when using moving average crossovers, when the short period average is above the long period average, you should be long. Similarly when the short period average is below the long period average, you should be short. These crossovers between the three averages are an indication the momentum is shifting from one direction to another. Moving Average Convergence Divergence (MACD) is based on these averages and is a powerful technical indicator in the trading arsenal of any trader. However, when trading with these crossovers, you should know this that these averages are lagging indicators. What this means is that they are giving a signal about the past price action something that has already taken place. These averages work very well in a trending market but do not work well in non trending or choppy markets.
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