The Moving average crossover strategy.
What is it?
Moving average indicators are standard within all trading platforms, the indicators can be set to the criteria that you prefer.
For this simple day trading strategy we need three moving average lines,
- One set at 20 periods,
- the next set at 60 periods
- and the last set at 100 periods.
The 20 period line is our fast moving average, the 60 period is our slow moving average and the 100 period line is the trend indicator.
How do I trade with it?
This day trading strategy generates a BUY signal when the fast moving average ( or MA) crosses up over the slower moving average.
And a SELL signal is generated when the fast moving average crosses below the slow MA.
So you open a position when the MA lines cross in a one direction and you close the position when they cross back the opposite way.
How do you know if the price is beginning to trend?
Well, If the price bars stay consistently above or below the 100 period line then you know a strong price trend is in force and the trade should be left to run.
The settings above can be altered to shorter periods but it will generate more false signals and may be more of a hindrance than a help.
The settings I suggested will generate signals that will allow you to follow a trend if one begins without short price fluctuations violating the signal.
On the chart above I have circled in green four separate signals that this moving average crossover system has generated on the EURUSD daily chart over the last six months.
On each of those occasions the system made 600, 200, 200 and 100 points respectively.
I have also shown in red where this trading technique has generated false signals, these periods where price is ranging rather than trending are when a signal will most likely turn out to be false.
The first false signal in the above example broke even, the next example lost 35 points.
The above chart shows the first positive signal in detail, the fast MA crossed quickly down over the slow MA and the trend MA, generating the signal.
Notice how the price moved quickly away from the trend MA and stayed below it signifying a strong trend.
The second false signal is shown above in detail, the signal was generated when the fast MA moved above the slow MA, only to reverse quickly and signal to close the position.
Although the system is not correct all the time, the above example was correct 6/12 or 50% of the time.
We can immediately see how much more controlled and decisive trading becomes when a trading technique is used. There are no wild emotional rationalizations, every trade is based on a calculated reason.