Moving Average Line Indicator

Description:

The Moving Average 1 Line Indicator is perhaps the most widely used technical indicator in existence. It is a simple moving average of prices over a specified length of time. Many analysts use the moving average in order to determine the direction of the trend. The average is calculated by adding all the prices, then dividing the sum by that length.

Conventional Analysis:

One moving average is often used to identify the trend of a market. It can be used in conjunction with other averages in order to generate buy and sell signals when the averages cross. Moving averages of all types can also be used as a filter within a trading system in order to reduce "whipsaws." For example, you may only want to take long trades when the average is moving in an upward direction, or when price is above the moving average.

Additional Analysis:

Most indicators based on moving averages work best in trending markets. Sideways markets tend to cause severe whiplash with average-based strategies. By adding a second displaced moving averages study to a chart window (a fast and a slow), you could use crossovers as buy and sell signals. While the conventional usage of a moving average considers price action below the average as bearish, in some cases it can represent a buying opportunity. This is often true for cases where price has dipped below the moving average and the moving average has continued
in an upward trend. This type of buying opportunity would generally be accompanied by decreasing momentum in the decline. For example, a modest dip below the average for the last 1-3 bars with Low > Low[1] for the current bar.

Additional References:

Kaufman, Perry J. The Commodity Trading Systems & Methods. John Wiley & Sons, Inc. New York. 1978.