I'm reading on Investopedia that one should buy a stock if short term moving average is ABOVE the long term moving average, since this "indicates an upward trend".

However, this is not intuitive to me. Wouldn't it be more beneficial to buy when the opposite is true? I.e when the short term trend is below the long term trend, since you can expect the market to correct itself and there make a profit.

It's obviously a matter of personal preference, but the latter makes more sense to me. What's the general consensus?

  • $\begingroup$ As s general observation, Investopedia is a constant source of economic error. I would use Wikipedia in preference. More reliable, as well as thorough. $\endgroup$ – user629019 Sep 11 '18 at 17:45

Under weak-form efficient markets neither situation is more profitable to buy in.

Contrarily, under technical analysis, the answer depends on whether you adhere to a mean-reverting or a momentum theory of the market. Under the former, your supposition is correct. Under the latter, certain shorter-term MAs crossing certain longer-term MAs from below are deemed to be breakouts. Exact cases vary in the literature.

The best thing is, all of these theories are easily testable.


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