MA Crossovers and Simple Systems - Part 2

Additional Reading About MA Crossovers and Simple Systems

Moving average crossovers are momentum indicators that occur during momentum trading. Crossovers occur when a faster moving average rises above or falls below a slower one. An example of this occurs when a 13-day simple moving average rises about a 100-day simple moving average.

In this type of crossover, the signal line is not static and must be proved manually by the trader. This is a certain flexibility which makes MA crossovers much more adaptable to changing market conditions.

These momentum indicators are also useful for both range trading and trend following but because moving averages generate smoother and more reliable signals in trending markets. Many momentum traders choose to use a simple moving average for the slower MA and an exponential moving average for the fast component. 

Instructor's Notes

This lessons' video introduces another confirmation method for determining when the trend has changed: when a faster moving average crosses over a slower moving average, or vice versa.

It is very important to know that moving average crossovers are only one tool available for this purpose, and frequently produce unreliable results. When the moving averages have been close together for a while, any crossover tends to be worthless. You will need to practise and/or to analyze historical data to get better ideas of which crossovers tend to be more indicative of a true trend change than others.

The video goes on to state that it is worthwhile expirementing with different MA values to produce the best results. It is recommended to try to stick to the most widely used MA values such as 5, 10, 20, 34, 50, 100 and 200. Beware of "curve fitting", where you might play with values to discover that the 12 period crossing over the 29 period MA has been working very well recently on a specific time frame of a specific curency pair. It is likely to be a random result.

The lesson video's messages are:

• A possible momentum/trend change is signalled by a shorter duration MA crossing a longer duration MA, or vice versa.
• Do not trade DBBs alone, use at least one other indicator as confirmation, such as trend or trading range measurements, S/R levels, chart patterns, momentum indicators, and timing/cycle indicators. Try to use at least one indicator from each of these categories.

MA Crossovers and Simple Systems Part 2 - Text Version

The other type of moving average crossover that signals a possible momentum and trend change occurs under the following circumstances:

• A shorter-duration (and thus faster, more sensitive) moving average crosses above a slower, longer duration moving average (which is thus less sensitive to recent price changes), signaling upward, bullish momentum.

• A shorter-duration moving average crosses below a slower, longer duration moving average, signaling downward, bearish momentum.

Do you see how this kind of moving average crossover differs from the rest?

Moving Average Crossovers: Momentum

In this variation of Moving average crossovers, instead of price crossing over or under a moving average, two or more moving averages cross each other.

Either or both of these kinds of MA crossovers could be used in combination with Double Bollinger Bands or with each other, to confirm changes in momentum. Only by experimenting with different combinations of momentum indicators would you know which works best for different pairs, time frames, and types of markets.

As you read various analysts, you’ll constantly hear about how they’re waiting for, or now have, a “signal” from their secret proprietary system that momentum has changed. Usually there is no deep magic to these systems. They are usually nothing but a set of rules for when to buy, hold, or sell, depending on what a collection of technical (or other kinds) of indicators are showing.

Trading with almost any simple system is better than not using one at all, because the system gives you a starting point of rules to follow. You can then change each rule one at time, and systematically refine and expand it until you have something that works and that you know why it works.

For example, traders using just DBB and MA crossover signals would quickly find that they got better results when adding at least one of each of several other kinds of technical indicators.