Moving averages

The most simple trend indicators are moving averages.
They simply correspond to an average calculated on an evolving time
scale: every day, the oldest value (often taken at the close) in the average
calculus is replaced by the value of the new session.

Consequently, the predictive interest of this
indicator is nil (since it represents prices evolution with a certain
delay). Still, it enables one to determine trends of mid or long term,
stronger and stronger as the average direction is steady.

In spite of the simplicity of this indicator, the length of
averages used should be handled with caution. Indeed, analysts prefer using
two moving averages simultaneously, with quite different lengths to
forecast possible trend reversals. Thus, one will often jointly use moving
averages calculated on 20 and 50 days, or on 50 and 100 days…

In particular, this simultaneous use makes it possible to
determine buying signals. These occur whenever a short term moving
average (e.g. 20 days) crosses a longer term moving average (e.g.
50 days) coming from beneath and thus comes above. This expresses the
tendency of the stock to have its most recent prices at a level higher than
older prices, thus showing a bullish trend.

Reciprocally, a selling signal occurs whenever a short term
moving average crosses down (i.e. from above) a longer term moving average and
thus comes beneath.

Overall, the interest of moving averages is to avoid
going against the market trend when it follows a strong move.