Moving rates are the result of determining the "average" of multiple price points over specified period of time.
The specific price points used can vary. They typically will consist of either 1) opening prices, 2) closing prices, 3) high of the time period price range or 4) low of the time period price range. The most common used is the closing price of the time period displayed on a chart.
The time period used for the calculations can vary as well. Some examples time periods would be a 10 period, 20 period as well as the more commonly seen 50 and 200 period.
Since these technical indicators are based on past price points, this type of indicator is considered a lagging indicator. Many people use these to help identify and display trends on stock charts.
Different Types Available
In addition to varying price points and time period possibilities, there are also different types. Each type is calculated using a different mathematical formula, some simple and some more complex.
Some of the most common types are 1) simple moving average (SMA) and 2) exponential moving average (EMA).
Potential Signals For Trading Opportunities
Since these are lagging indicators and can help display a trend, trading opportunities can come about when the trend changes. A trend change can be identified using one of the signals below:
Signals are typically given when a crossover occurs. A crossover can occur when prices themselves move above or below a single moving average (also sometimes referred to as single crossover) or multiple moving averages, as well as when multiple averages are used and one of them crosses above or below the other (s ).
Many traders will use different types to help identify trends, entry signals, exit signals as well as potential support and resistance levels. Some traders will use these indicators alone and others will use them in conjunction with other technical or fundamental analysis techniques.
In order for anyone to come up with a system and techniques that work for them individually, testing must be performed in various trading scenarios. By this I mean that a single test and its results should not be assumed to be a one size fits all solution. Testing on various time frames and even using various time periods used for the calculation of the moving average itself should be done.
Source by Larry Both