Trading systems designed with moving averages are generally trend following systems. Trend-following trading systems are designed to catch a trend in the market, so the methods often generate buy signals when the market is going up, and sell signals when the market is going down. This is called buying the market on strength, and selling the market on weakness. Three of the more commonly known rules for moving averages are:

1. Buy when the market closes above the moving average or combination of averages. Sell when the market closes below the moving average or combination of averages.

These rules usually provide the greatest number of whipsaws, which can be especially apparent in congestion type markets when even a small move will generate a signal. Therefore, the better entry and exit levels come with a tradeoff of more false signals and losing trades.

2. Buy when the short-term moving average crosses above the long-term moving average. Sell when the short-term moving average crosses below the long-term moving average.

These rules usually do not generate as many trades and, therefore, may promise fewer false breakouts. However, the entry and exit levels will usually be worse than in the first set of rules.

3. Buy when the short- and long-term moving averages both point up. Sell when the short- and long-term moving averages point down.

These rules are similar to the second set and the same ideas apply.

You may notice the above rules would have a position in the market an the time. Such trading systems are caned stop and reversal systems because the position is stopped out and reversed, leaving the trader always in the market. The rationale behind this type of system is that the trader is always in a position to catch a big move.

Should a trader have a position in the market all the time? The answer to this question is dear to some and uncertain to others. Some people adamantly believe it is necessary to always maintain a position in the market to be certain of catching a major move. Other traders wait for times and markets they believe to be optimal for their type of trading.

Do not be deceived into thinking you will catch every move if you always have a position in the market. You may have a position, but it could be on the wrong side and may prove quite costly. For example, being long July 91 platinum in May, proved 10 be costly when the market opened lower near the 370 level near the end of May. Going short at that point did not help much either as the market rallied from the 370 level. Sometimes it is best to simply sit on the sidelines when trading, because markets do not always trend and can be quite random or trend less at limes.