Multiple Moving Averages

Moving averages can become more powerful when more than one is plotted on the same chart. We would use one long term average (for example 40 day) and one short term average (for example 20 day). These are used separately from the actual price action of the product we are charting. A buy signal would be generated when the short-term average moves above the long-term average line if both lines are directed upwards. A sell signal would be generated when the short-term average moves below the long-term average line if both lines are directed downwards.

 

Moving averages only work well in trending markets. When a market fluctuates in a narrow trading channel, moving average generate only false signals.