The moving average crossover method is one of the oldest technical analysis
techniques used in trading. There is not exactly one combination of periods
that a trader might use. We use a 5 and 20 EMA in this column.
What is more important is what happens on a signal. I like to call it
trading on expectations. If a stock is truly reversing direction, the stock
should move up sharply after crossing the longer moving average. If the
stock fails at this longer moving average, the average is just resistance as
the stock keeps moving lower with the Sell Short signals working, while each
long signal fails at the moving average.
Moving Average Crossovers
Moving averages are one of the oldest and most popular technical analysis
tools.
A moving average is the average price of a security at a given time. When
calculating a moving average, you specify the time span to calculate the
average price for X number of periods. For example, 20 periods. These
periods may be 5 minute bars, 15 minute bars, 60 minute or daily bars).
The classic interpretation of a moving average is to use it to observe
changes in prices. Investors typically buy when a security's price rises
above its moving average and sell when the price falls below its moving
average.
The moving average crossover method calculates two moving averages, each
based on a different number of periods of trading data. When the
shorter-term (fewer days) average crosses above the longer-term average from
below, this is a buy signal for tomorrow's open. When the shorter-term
average crosses below the longer-term average from above, this is a sell
signal for tomorrow's open.
The current charts we are using calculate a 5-period and a 20-period
exponential MA of the closing prices on 60 minute bars. If the 5-period MA
crosses above (becomes greater than) the 20-period MA, you would buy the
next bars opening because the system is saying that an uptrend has begun.
You maintain this long position as long as the 5-period MA is greater than
the 20-period MA. When the 5-period MA crosses below the 20-period MA, the
trend is now down and you would liquidate your long position and establish a
new short position on the next bars open.
COR Therapeutics (NASDAQ:
CORR)
After a recent decline, CORR had a moving average Buy signal on November
24 and moved up from 36 to 45 as a moving average Buy signal would be
expected.
Today, November 28, 2000, CORR reversed and has now flashed a Sell signal.
I would exit the long trade as this time.
An aggressive trader may want to short CORR here at 39.
If shorted here, I would place a stop at 41 �.
The expectation is that CORR will drop from here, just as it went up from
36.
