Price Minus Moving Averages

Overview

Use in Technical Analysis

Moving Averages are used in technical analysis as a method of detecting a trend. An asset is said to be in a trend if its current price is higher than a given moving average, for example, a 50 day or 200 day moving average. This is referred to as the price minus moving average rule. The calculation of the moving average requires the specificaiton of a given time frame. (as in 50 days, or 200 days) The time frame chosen is said to indicate the time frame over which the trend has ocurred. A 200 day moving avereage is thought to be more of a long run trend, whereas a 50 day or shorter can be thought as a short term trend.

An alternative calculation would use a short term moving average instead of the price. For example, one could calculate the 20 day moving average minus the 200 day moving average.

Trend Following

Moving Averages are typically used in strategies that purport to follow trends. That is, if the current price is above a given moving average, then that indicates the asset is in an upward trend and is a buy. If the current price is below the moving average, this would indicate that the trend is down and should be sold.

Trend following is pitched as being a strategy that can work in both bull and bear markets, because the trader is following the trend.