Because moving average is a trend following indicator, you should use it when a security is trending. Application of moving averages would be ineffective when a security moves in a trading range. With this in mind, investors and traders should first identify securities that display some trending characteristics before attempting to analyze with moving averages. With a simple visual assessment of the price chart you can determine if a security exhibits characteristics of trend.

Using price chart you can analyse whether a stock is trending up, trending down or trading in a range. When a security forms a series of higher highs and higher lows it is said to be in uptrend. A downtrend is established when a security forms a series of lower lows and lower highs. A trading range is established if a security cannot establish an uptrend or downtrend. If a security is in a trading range, an uptrend is started when the upper boundary of the range is broken and a downtrend begins when the lower boundary is broken.

It is sometimes difficult to determine when a trend will stop and a trading range will begin or when a trading range will stop and a trend will begin. The basic rules for trends and trading ranges laid out above can be applied.