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Trend Indicator: Moving Average
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The n days moving average is the arithmetic average of the closing prices of a stock during the last n days.

With:
P_t the closing price at the date t.
P_t-1 the closing price at the date t-1.
MA_tn the n days moving average at the date t.

The n days moving average can be computed as follows:

Interpretation

When the price line cross the moving average line from the top, it gives a sale signal. When it is from bottom, it gives you a purchase signal.

The above signals are generally considered as valid if you have at the same time a trend change on the moving average line.

The lag you choose to compute your moving average (n days) has a lot of influence on the signals you get. The more n is small, the quickest the moving average gives you signals but the less relevant they are. That's the reason why a lot of chartists used as signal the crossing of a short term and a long term moving average and also compare the moving average signals with the ones of other indicators.

You can use the lag you want but the most often used are 10,40,50,150,200 and 250.

The moving average is often considered as too static (old quotes have the same importance as new ones). To improve the moving average signals, technical analysts have developed other moving average indicators: the weighted moving average and the exponential moving average.

Graph Example: short and long moving averages

On the above graph you can see an illustration of the moving average. In red you have the price line, in yellow a 10 days moving average, in blue a 50 days moving average and in gray a 100 days moving average.