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Moving Average Crossover strategy

The moving average Crossover strategy are a common indicator in technical analysis. They are the best indicator that serves the foundation of countless others. A moving average works by working with smooth price fluctuations into a single line that ebbs. They based on past prices and therefore called lagging indicators. It is used as part of a trend that follows the system and support/resistance line in itself. They should not be used in isolation for traders who trade-off with technical analysis due to lagging nature. They should be used as a part of a broader system. It is geared towards finding the middle of a trend. The trend defines the price action in which price moves in a specific direction over a period of time. The trends are upward/downward direction as sideways movement consolidation and not trends.

Trade Example

The moving averages will be applied by using a crossover strategy. We have to choose two different periods as 10 and 42 then use crossovers. They are used to interpret as confirmation of trend changes. We use a moving average instead of an exponential moving average as it can be changed. The 10period SMA will be fast moving average and more reactive to price than the 42-period slow SMA. When the price is in an uptrend the SMA will follow at a fast price than the slow EMA. when 10period SMA crosses above 42period SMA it will be a bullish sign. They will be biased towards the long trades. When 10period crosses below the 42period SMA it will be interpreted and called a bearish sign.

Issue

The strategy is best but the problem is that when the market is consolidating it will give many false signals. During the period between April 2014 and April 2015, the 5 / 20 moving average crossover produces the 5signals that don’t foreshadow a trend.

Working

On the platform, we plot simple moving averages for you but it is important to understand how they’re calculated. When they are plotted on a chart SMA will appear as a line that follows price action with a short time period of the SMA. The closer it will follow price action. The strategy involves 4-period, 9-period, and 18-period moving average. They will help to ascertain which direction the market is trending. The shorter moving averages will hug price action closely than the longer ones. This is because they’re focused on recent prices. So we can deduce the shorter moving averages that will be first to react to a movement in price action. Both the crossovers appear as an 18period SMA if there is a sharper push from all moving averages and strategy becomes subjective. The favored path of attack from here is to judge the strength of the trend and proceed. We should wait for the aforementioned moving averages to re-cross each other. Then determine when to exit the position. The stop should be placed away but close enough to minimize loss. We use stop orders for all trades by placing such orders that will not limit your losses.

Conclusion

The moving average is a popular indicator that is used in securities trading. They function as an indicator that forms the basis of several others. There is the simple moving average which averages as all prices are equal. The exponential moving average weight has recent data.