In this article, we will talk about how to trade using the moving average crossover strategy and what is the moving average.
What is the Moving Average?
The moving average is one of the most popular technical indicators, available to traders. There are several ways to trade using the moving average (MVA). These include using MVA as support and resistance, MVA as a trailing stop loss, or using it for the crossover strategy.
We will be using the simple moving average (SMA) for this moving average crossover trading strategy. The simple moving average is calculated by averaging the closing price for a certain period. The calculation below shows how the SMA is calculated for 7 periods.
Now let’s look at what the moving average crossover is.
What is the Moving Average Crossover?
A moving average crossover happens when two moving averages with different periods cross each other. This can be two moving averages with any two periods. The following chart shows an example of this.
There are two moving averages in the above chart. One is 20 period SMA (Yellow) and the other is a 50-period SMA (Blue). As you can see from the above chart the crossover point is when these two moving averages cross each other.
The Moving Average Crossover Strategy
In this section, we will talk about how to trade using the moving average crossovers. It is important to note that the moving average works best in a trending market. In a ranging market, it is better to use a different indicator such as the Bollinger bands.
A very simple strategy to trade with the simple moving average is to enter and exit a trade between two consecutive crossovers as shown in the above chart. We used a 20 Period SMA and a 50 Period SMA in the above chart, these are currently the best periods for moving average crossovers. You can place the stop loss below the first crossover and ride the trend until the second crossover.
But, beware that this strategy still only works if the market is trending like in the above chart. Most of the time the market will not be trending.
Another way you can use the moving average crossover is to use the crossover point as an entry point to a trade or an exit point to trade in combination with price action. This is a better way to use the moving average crossovers.
Conclusion
Moving averages are a great technical indicator that can be used in different market conditions. The moving average crossover strategy is a great strategy that works in a trending market but not so well in a ranging market, but there are other ways to use the moving average as discussed in this article.
If you are interested in learning about how to trade the forex market check out our free guide here. In our guide, we cover multiple different trading strategies that will help you to trade in different market conditions.
