Indicators are not always what they appear to be. Moving Averages are widely used as a trend-following tool. In many of the trading strategies that we have developed over the years, the 200-day moving average is used to identify the direction of the trend. We have found that taking buy signals only when the price is above the 200-day MA can improve profitability in many systems.
Recently, we completed research that shows moving averages can also be used as part of a strategy to find short-term, mean reversion trading opportunities. This may be surprising to some traders because it might seem odd to use a trend-following indicator like MAs in a short-term, mean reversion strategy.
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