2) As an indicator of general trend based on the 2 different moving averages:
– Moving averages of different lengths represent a general price of different degree. For example, the 21-SMA represents short-term mean price action versus the 200-SMA, which represents a long-term mean price action.
– A crossover between a shorter to a longer term moving average (ie. 55 SMA crossing 100 SMA) reflects a change in trend. Meanwhile, if the distance between the 2 moving averages are spreading, we should see continuing progression and strengthening of a trend.
Trend Following Crossover:
Here is an example of the EUR/GBP Daily chart taken for price action from end of April towards the end of June.
Red is 55SMA, Blue/Violet is 100SMA: Note the crossover reflecting the change in trend of the market, but also note that this crossover happens with a lag after the market already turned:
False Crossover Signals During Range:
Because of the lag, if the market is not trend and choppy, the signals will be too late and false. Here is an example of the EUR/GBP with a couple of late and false signals, before a late but signal that still was followed through:
1) As an indicator of general trend relative to price
2) As an indicator of general trend based on the 2 different moving averages
3) Other multiple moving average systems
In construction of other indicators:
5) MA envelop – Bollinger Band
6) Horizontal shift; in Ichimoku Charts
7) “Smoothing Out” other Indicators ie. Stochastic Oscillator