Moving Average Crossover
The moving average crossover is a very simple method of trading. This method is a great way to introduce beginning traders to an easily interpreted entry into a trade as well as an exit to a trade. It is based off of using 2 different moving averages. When the moving averages cross each other, it signals a trade entry or a trade exit. The shorter moving average crossing up through the longer moving average would indicate a buy signal. This would also indicate an exit from a sell trade. When the shorter moving average crosses down through the longer moving average, this indicates a sell signal or an exit from a buy trade.
As with any method, certain methods or tools work great under certain conditions and not so great under different circumstances. The crossover works great when you have trending conditions. It doesn’t work so well when in a trading range. Even though it doesn’t work well in a trading range, the crossover method would keep losses small. Under trending scenarios, the crossover could yield some great gains.
The best idea is to use the crossover method as a beginning point to trading. The best thing to do is to identify if trading is occurring in a range by recognizing support and resistance levels. If in a range of support and resistance, a crossover would not be a good entry signal. After a crossover, the only way a trend will form is by a break out of the range. Look for a break in support for a sell trade. Look for a break in resistance for a buy trade.
Usually when a crossover occurs, it is not clear if a new strong trend is beginning. Usually you have to wait a little before a strong trend forms. Make sure there is no immediate support or resistance to prevent the trend from continuing. Then wait for a short move against the trend. Once the counter move is over and starts returning to the trend an entry can occur.
A crossover is also a final indication that a trend has ended. One can certainly exit prior to a crossover, but once the crossover occurs, any trend trade should be exited.
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