Moving Average Cross Over – Simple Trading Strategy

Moving Average Cross over Concept

Moving average cross over is a very popular concept! Traders have used this phenomena since a long time.

A moving average cross over is a condition on the chart, where, either the price crosses over moving average or moving averages themselves cross over each other. Whenever these crossovers take place, traders find an opportunity to BUY or SELL in the market.

We will discuss moving average cross over concept in detail in the coming sections, but before that, Let’s understand what are moving averages ?

WHAT ARE MOVING AVERAGES ?

Moving averages are popularly used in the Forex market by the technical analysis as the technical indicators. In modern days, they have become a major factor in the creation of forex trading strategies because they are very easy to use during the technical analysis.
 
The moving average crossovers have been used for a very long time by many Forex traders. They have been tested, measured, and applied for a very long time. Results have made them the basis for the modern forex trading strategies derived by Technical analysis.
 
A moving average allows you to override the amount of “noise” on the Forex price chart. If you look at the direction of the moving average, you can be able to get the basic idea of how the prices are moving. If it is angled up, the price is going up overall.
A moving average can also act as dynamic support or dynamic resistance level.
 
For example, 200 daily moving average acts as a “wall between the trends”
If the the price is above 200 daily moving average, then it is in uptrend and vice versa.
 
 

Popular types of Moving Averages

 
This section of the article provides various types of moving averages.
 
NOTE: You do not need to know, how to calculate moving average. It is simply not required, because your broker or trading platform does it for you automatically. Let’s Trade Smart, not Hard! 🙂

The simple moving average (SMA)

This is the type of the average that can be used to add up the previous and most recent daily closing prices, and it divides it into groups of five to create a new average on every day. You connect every average to the next average; thus, in the end, you come up with a singular line.
Point to be Noted: Simple moving average does not give importance to recent changes in the price.

The Exponential Moving Average (EMA)

exponential moving average is the second type of the Moving average you should be aware of. It is different than the simple moving average, because it has more complex calculations and it gives more weight to recent price changes.
 
To prove this, you can perform a particular test where you can put a 50-day SMA and a 50-day EMA on one chart. If you do so, you will notice that the EMA acts quickly towards the changing prices compared to the SMA because of the additional weighting on the recent price change data.
 
The trading platforms like mt4, mt5, ctrader perform the calculation, hence you are not required to do any manual math to determine the moving average. There is usually no moving average that is better than the other. The EMA is better in the financial markets or stocks for a given period of time, and in some time, the SMA performs the work better than the EMA.
 
Now let’s learn all about moving average crossovers.
 

Moving Average Crossover Concept & Strategies

Basically, There are two types of popular moving average cross overs. Let’s dive deep into these moving average crossovers.
  1. Moving average Price Crossover
  2. Two MA (moving average) crossover

 

Moving Average Price crossover Strategy

In this strategy, a trade setup is expected whenever the price crosses above or below a moving average. (moving average can be either SMA or EMA).

A BUY signal is generated, if and only if,

Price Crosses and closes above the moving average, retests the moving average with enough buying pressure.

A SELL signal is generated, if and only if,

Price crosses below the moving average. It retests the moving average with enough bearish momentum.

 

TWO MA Crossover Strategy

In this strategy, a trade is taken whenever the two moving average crosses over each other. Here there are 2 types of two MA cross overs. One is GOLDEN CROSS, the second one is DEATH CROSS.

There are different ways and different moving averages considered for this strategy. But we will state the most popular one.

GOLDEN CROSS

Golden cross occurs, when a smaller moving average crosses above the larger moving average. For example,

A BUY signal is generated, if,

100 moving average crosses above 200 moving average.

 

DEATH CROSS

Death cross occurs, when the smaller moving average crosses below the larger moving average. For example,

It generates a SELL signal, if,

100 moving average crosses below 200 moving average.

PRO TIP
Combine this strategy with other technical confluences like RSI, MACD, or stochastic oscillator for better results. You can back test and derive your own strategy using your own moving averages, it doesn’t have to be always 100 MA or 200 MA.
 

Limitations of Moving average Crossover Strategy

One of the main drawbacks of the moving average cross over is that, Moving average forms based in the recent data. In its calculation, it does not have any factor that is predictive in nature.
 
This means that if you use Moving average crossover, the results you obtain are likely to be random. 
Another problem is that the price action tends to become a bit choppy, and the price is likely to swing forward and backwards, giving out different trend trade signals. If this happens, as a trader, you should always seek to step aside and implement another indicator that will help you to clarify the trend.
This scenario can occur with the Moving average crossovers, whenever the moving averages tangle up for a particular time, causing multiple trading losses.
The moving averages usually work well in powerful and trending conditions; however, they are poor in ranging conditions. Adjusting the time frame can solve this problem but it is temporary. These issues occur regardless of the length of the Moving average that is in place.

Conclusion

Moving averages can simplify the data of the price by just smoothening it, and it creates a single flowing line. This allows the traders to be able to see the trend very quickly and easily.
The Exponential Moving averages are faster, and they react very fast to the changes in the prices compared to the other moving averages. In most cases, this makes it better, and in other scenarios, it has its drawbacks because it can cause false signals.
 
Moving averages that have a shorter length or look back period respond quicker to the prices’ changes than the moving average with longer lookback periods.
 
Moving average crossover is a most popular strategy, for both the exits and the entries. The moving averages highlight potential resistance or resistance.
 
 
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