So far, you’ve learned how to draw moving averages on your charts to determine the trend.
Moving averages can also assist you in determining when a trend is going to finish and reverse.
As trend traders, your goal is to spot the trend and ride it for as long as feasible.
You must know when to enter and when to exit.
A trend is merely the general direction of a price over a short, immediate, or long period of time.
Some trends last for a few days, weeks, or even months, while others last for months.
However, you never know how long a certain trend will persist.
A technical indicator known as a moving average crossover might assist you in determining when to enter and exit a trade. When two different moving average lines cross over one another, this is known as a moving average crossover. The crossover strategy may not capture exact tops and bottoms since moving averages are a lagging signal. However, it can assist you in determining the bulk of a trend.
These three questions can be answered with the use of a moving average crossover system:
- Which way is the price likely to trend (if at all)?
- Where might a trend trader find a good entry point?
- When do you think a trend will end or reverse?
Simply place a pair of moving averages on your chart and watch for a crossover.
If the moving averages cross over, it could indicate that the trend is about to shift, allowing you the opportunity to obtain a better entry. You have a better chance of winning more pips if you have a better entrance!
Why can’t you make a living with a killer crossover move like Allen Iverson did?
Let’s take another look at the USD/JPY daily chart to better understand moving average crossover trading.
The pair was in a nice rise from April to July. It peaked at roughly 124.00 before gradually declining. We can observe that the 10 SMA crossed below the 20 SMA in the middle of July.
So, what happened after that?
This is a great downtrend!
You would have profited almost a thousand pips if you had shorted at the crossover of the moving averages!
Of course, not every trade will result in a thousand-pip, hundred-pip, or even 10-pip profit.
It could be a loser, so you’ll need to think about things like where to put your stop loss and when to grab profits. You can’t just jump in without a strategy!
Some traders close out their positions whenever a new crossover has occurred or the price has gone against the position by a predefined number of pips.
This is what Huck’s HLHB system does. She either exits when a fresh crossover is made or has a 150-pip stop loss in case something goes wrong. This is due to the fact that you never know when the next crossover will occur. If you wait too long, you can injure yourself!
One thing to keep in mind when using a crossover system is that while they function well in a volatile and/or trending environment, they don’t operate as well in a ranging setting.
You’ll be bombarded with crossover signals, and you may find yourself stopped out several times before catching a trend again.
In conclusion, moving average crossovers are useful in determining whether a trend is beginning or ending.
Specific triggers for probable entry and exit sites are provided by the crossover system.
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