December 16, 2008
Moving Average Crossovers
Moving average crossovers are used extensively by forex traders and occur when a shorter period moving average crosses a longer period moving average. So a good entry point is generally obtained by entering a position soon after the crossover has taken place.
If you are familiar with my main forex trading strategy (available by filling in the short form to the right), you will know that I place great importance on these moving average crossovers. I personally like to use Exponential Moving Averages (EMAs) because they respond the quickest to changes in price (although they are still lagging indicators to some extent).
I like to trade when the EMA (5) crosses the EMA (20) when trading forex, and indeed when trading stocks as well, and it tends to work well in general providing you only trade those crossovers that are in the same direction as the overall trend.
You don't necessarily have to use these particular periods though because there are lots of other combinations that are popular with traders. For example some people like to use 8 and 21 periods while 20 and 50, and 50 and 200 are also popular combinations depending on your own particular trading style and the time frame that you use.
You will generally find that whichever combination of moving averages you use, you will have more success as you lengthen the time frame. So moving average crossovers on the monthly charts, for instance, provide very strong trading signals whereas the crossovers on the 1 minute and 5 minute charts are a lot less reliable.
Of course if you want to increase your success rate even further you can also use moving average crossovers in conjunction with other technical indicators. However you don't want to use too many otherwise it just complicates matters, and you will find that you get a lot fewer set-ups as a result.