Moving average crossover Strategy Guidelines (PDF)
Moving average crossover Strategy is one of the most popular tools in technical analysis. It is a standard tool that is available by default on most trading platforms. However, it is very helpful for forecasting the direction of the trend. The strategy is available in PDF format. There are a lot of methods to integrate moving averages. here we will focus on moving average crossover strategy. It occurs when two or more MA lines cross over one another. And helps to identify entries and exits. Depending on your trading strategy you can use the 2 or 3 moving average crossover strategy. Ans you can choose the SMA or the EMA crossover strategy. In this course, we will discuss the moving average crossover strategy, and explain how to use it to build a good trading strategy.
Moving average crossover strategy
What is moving average crossover strategy ?
There are several types of moving averages that use similar concepts But differ in their calculations. However, the two most used types of moving averages in the forex trading are:
- Simple moving average (SMA)
- Exponential moving average (EMA)
The SMA and EMA represent the average of a certain amount of data over a predetermined period of time. However, the SMA only plots lines based on the average price movement and they are not weighted towards any particular point in time. In contrast, the EMA focus on more recent data.
The moving average is used by a lot of traders as it helps them to identify when the trend is about to end or reverse. And as traders always look for determine and control the trend for as long as possible, they need to know when to get in and when to get out. Therefore, moving average crossover can help them to do that.
1 Moving Average Strategy example
The moving average crossover strategy is a technical analysis method that occurs when 2 different moving average lines or more cross over one another. This strategy is invented to help traders to enter and exit trades. In fact, MAs are lagging tools. as a result, the crossover strategy might not catch the precise top and bottom of the prevalent trend, but can identify the majority part of a trend. In addition, the moving average crossover strategy allows forex traders to know in which direction the price is trending if there is, sure. where can be a potential entry point to trade a trend? and when could a trend ends or reverse?
The MA crossover strategy is a self-contained strategy. This means that you only need to place a couple of MAs on your price chart and wait for a crossover. You can employ any kind of moving average: simple moving average, exponential moving average, or even smoothed moving average.
In fact, using one moving average can smooth out the prevalent price action and give an idea about the overall trend. Using two moving average give you signals about the bullish and bearish trend. While using multiple moving averages enables you to measure the strength of the trend and find trading opportunities.
2 Moving Averages Crossover Strategy example
Basically, there are two types of moving average crossover strategy:
The golden cross:
It needs two moving averages to apply to the chart. One shorter period MA and one longer period MA. When the shorter period MA line crosses above the longer period MA line, then this is a signal to buy. And indicates that the trend is moving up.
For example, if you take 50 ema period for the shorter-term line and 200 ema period for the longer-term line, then when the 50 ema crossover the 200 ema line and breaks above it, then you can enter a long position.
The dead cross:
Should be there 2 MAs on the chart (shorter and longer). If the shorter MA term line crosses below the longer-term MA line, then it is a signal to sell. And indicates that the trend is moving down.
Bear in mind that there is no difference between using smooth, simple, or exponential moving averages. They are all good.
3 Moving Averages Crossover Strategy example
3 moving average crossover strategy use three moving averages of different periods to identify the overall trend in the market:
- Long-term: called the slower MA line.
- Medium-term: the slow MA line.
- Short-term: the fast MA line.
These MAs can be simple moving averages (SMA) or exponential moving averages (EMA).
The triple moving average comes later compared to the dual moving averages. The reason behind this, is that we wait for another confirmation from the third MA line. Which takes additional time. However, the 3 moving average crossover strategy is more accurate as it contains extra confirmation. So this will reduce the probability to act on false signals. You can use 3 moving averages together to filter the price action to indicate the best entry and exits.
Moreover, the crossover of the three MA lines at the same time can indicate bullish signals and bearish signals. When the fast MA line crosses above the slow MA line, and the latter crosses above the slower MA line. This will generate a bullish signal and a sign to enter a long position. Conversely, when the fast MA line crosses below the slow MA line, and the latter crosses below the slower MA line. It will generate a bearish signal and a sign to enter a short position.
EMA crossover strategy example
EMA crossover strategy is a method in which you use the exponential moving average. You can use two or more EMAs depending on your trading strategy.
If you are a day trader and you will use the ema crossover strategy, there are some popular settings that you need to know:
- 9 EMA period: represents the fast line. Generally used to filter the trend.
- 21 EMA period: represents the slow line. Very good for riding trends.
- 50 EMA period: represents the slower line. The best used to determine the longer-term trend.
When the 50 EMA period is above both the 9 EMA period and the 21 EMA period, then the chart is considered to lose short-term momentum. If the price decreases below 50 EMA period then it is a signal that there is a potential reversal in the trend. When the 10 EMA period crosses above the 21 EMA period above the 50 EMA period, this is a signal that there is a potential long entry. If the 10 EMA period crosses below the 21 EMA period below the 50 EMA period, this is a signal that there is a potential short entry.
Besides, when the 10 EMA period crosses above the 21 EMA period below the 50 EMA period, it indicates that there is a potential reversal in the longer-term trend from down to the beginning of an uptrend. Conversely, when the 10 EMA period crosses below the 21 EMA period above the 50 EMA period, it indicates that there is a potential reversal in the longer-term trend from up to the beginning of a downtrend.
How to use the moving average crossover strategy ?
Moving average crossover is a sort of indication where the shorter period (faster) moving average crosses the longer period (slow) moving average from above or from below. As the faster MA is more volatile, it will work to cross the slow MA. When you notice that the MA lines cross on the price chart, then it is a sign that the price may move in the direction of the crossover. If the shorter-term MA crosses above the longer-term MA, we obtain a bullish crossover. Otherwise, if the shorter-term MA crosses below the longer-term MA, we obtain a bearish crossover.
Benefits and risks of using this strategy
The moving average crossover strategy is used by lots of forex traders as it is considered among the profitable strategies. First of all, it is a very simple strategy that can be used by beginners and professionals and makes profits over time. Which why attractive to most people. Moreover, algorithmic traders employ it in their trading as it is been shown to be profitable.
Although the moving average crossover strategy is among the simplest strategies, it has some drawbacks. When you decide to use the crossover strategy you will apply the MA which brings you some uncertainty as we know the technical tools are lagging in nature. They sometimes do not respond to the changes that occur in the price immediately. So you risk having less reward and a larger risk.
The moving average crossover strategy is one of the most prevalent trading strategies. It is very easy to use as well as profitable. You have the choice to use any kind of moving average to trade with the MA crossover strategy: the SMA or the EMA crossover strategy.