The simplest interpretation is to treat a change of direction in a moving average as a signal to consider buying or selling. If the line has been ascending or level and it starts descending, that is a signal to consider selling. If it has been descending or level and it starts ascending, that is a signal to consider buying.
But that's a fairly superficial use of moving averages. You could draw the same conclusions by looking at the original price data.
Most technical analysts use a moving average in conjunction with the underlying price movements. The standard 'rules' are:
Click here for the full size graph.
Using the classic rules ensures that you will always be on the correct side of the market. Indeed, a price cannot rise too much without the underlying price rising above its average price.
But the disadvantage is that you will always tend to buy and sell late. On the Glaxo chart the actual point of the buy and sell signals is a day or two after the underlying price has started to fall or rise. That's why moving averages are called 'lagging' indicators.
On balance, the pros of using this system outweigh the cons. Better to be on the right side of the market, and leave a bit of profit for others, than try to squeeze every single penny out of the market and end up taking a hit.
One last thing to note with the classic interpretation is that the change typically needs to last for a period around twice the length of the moving average for you to make money once dealing costs are taken into consideration.
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