Moving averages crossover strategy

A simple moving average (SMA) crossover results from plotting two moving averages each based on a different period. The moving average formed by the shorter of the two periods is called the "fast" moving average, and the moving average formed by the longer period is the "slow" moving average. As changes in price occur over time, the "fast" moving average reflects these changes by moving upward or downward with the price quicker than does the "Slow" moving average. As a result these moving averages crossover each other. This crossover can be used to signal a change in trend and can be used to trigger a trade in forex trading system.

Fast moving averages crossover
Trading systems based on fast moving averages are quite easy to follow. Let's take a look at this simple system.
Currency pairs: ANY
Time frame chart: 1 hour or 15 minute chart.
Indicators: 10 EMA, 25 EMA, 50 EMA.

Entry rules: When 10 EMA goes through 25 EMA and continues through 50 EMA, BUY/SELL in the direction of 10 EMA once it clearly makes it through 50 EMA. (Just wait for the current price bar to close on the opposite site of 50 EMA. This waiting helps to avoid false signals).

Exit rules: option1: exit when 10 EMA crosses 25 EMA again. option2: exit when 10 EMA returns and touches 50 EMA (again it is suggested to wait until the current price bar after so called "touch" has been closed on the opposite side of 50 EMA).

Advantages: it is easy to use, and it gives very good results when the market is trending, during big price break-outs and big price moves.

Disadvantages: Fast moving average indicator is a follow-up indicator or it is also called a lagging indicator, which means it does not predict future market directions, but rather reflects current situation on the market. This characteristic makes it vulnerable: firstly, because it can change its signals any time, secondly – because need to watch it all the time; and finally, when market trades sideways (no trend) with very little fluctuation in price it can give many false signals, so it is not suggested to use it during such periods.

Slow moving averages crossover
Use time frame and currency which respond the best (1 hour, 1 day… or any other).
Indicators: (multiple of 7) 7 SMA, 14 SMA, 21 SMA.

Entry rules: When 7 SMA goes through 14 and continues through 21, BUY/SELL in the direction of 7 SMA once price gets through 21 SMA.

Exit rules: exit when 7 SMA goes back and touches 21 SMA.

Advantages: again it is an easy set up and does not require any calculations or other studies. Can produce very good results during strong market moves, the system also can be easily programmed and traded automatically.

Disadvantages: System requires periodical monitoring according to a chosen time frame. SMA indicator signal can be confirmed after the current price bar has been fully formed and closed. In other words, when SMA stops changing and the signal is fixed, traders may rely on such information to open a trade.



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