Price crosses above and below Moving Averages are the most important technical indicator to many technicians. We use them to set entry and exit strategies. The concept behind price and MA crosses is the same as most of what we have already learned. When the price crosses above the MAs that is considered bullish. Crosses below the MAs are bearish.
In the chart of the Dow Jones above, the price(black line) crosses above the 50 day Moving Average(orange line) at point A and the index begins to rise. At point B the 50 day Moving Average crosses above 100 day Moving Average(green line) and the uptrend continues and increases in strength. To get the best entry price possible it is always best to use more than one Moving Average. Also, point A should not be considered an entry point by itself. If all the other indicators we have learned about point to this as a good entry point then the stock is a buy. However, by itself it should just be considered a "heads up". Point A is where you should start to consider entering. Point B should be looked at as conformation of the buy signal. As a general rule, when the smaller (50 day) MA crosses above the larger (100 day) MA the bullish trend is very strong and at it's early stage. It is hard to lose if you get in at this point because it is considered a bottom.
The chart above is of YAHOO. This example shows a bearish cross and conformation in points A and B respectively. Notice how the stock takes a serious dive after the 50 day MA crosses below the 100 day MA. Crosses of the smaller (50 day) MA below the larger (100 day) MA are considered bearish.You can use just about any MA you like. Most people use the 50 and 100 day moving averages. These are longer term moving averages and tend to be very accurate. We want shorter term trades so I would advise you to use shorter MAs such as maybe a 30 day and 15 day in conjunction with or instead of the 50 and 100. Remember, when the price crosses the Moving Average start to pay close attention to the stock in question. When the smaller Moving Average crosses the larger one then it is safe to enter the trade. As always NEVER use any one indicator by itself to enter or exit a stock. Entry and exit prices should always be confirmed by as many indicators as possible.
