Traders often use an easy moving average created with a bigger number of periods (such that it’s reflective of future trends) as a mean price line – a line that is a base point for the market to maneuver with, above or below. This long-term average price line should function a support line during an uptrend and a resistance line in a downtrend.
If prices penetrate that long-term average price line, the trend could be slowing, the market heading toward a reversal. Certainly don’t trade thereon first average price line penetration alone – await confirmation signals that the market is indeed heading to a reversal.
In addition to employing a simple moving average as a long-term average price line against which you’ll measure current price movement, two moving averages (one fast, one slow) can also be used together to get buy and sell signals.
This type of indicator is named the moving average crossover, and may be a really nice compliment to the typical price line.
The moving average crossover indicator is formed of two exponential moving average lines. One is taken into account fast; that is, it incorporates a smaller number of periods and thus reflects more of the present market volatility. The other exponential moving average line (EMA) is taken into account slow; that is, it incorporates a bigger number of periods and thus reflects more future movement and fewer of the current market movement.
Different traders create the exponential moving averages with different number of periods. However, a safe default is to set the fast indicator at 10 periods and the slow indicator at 25 periods.