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 lon