Moving Averages (SMA, EMA)

These indicators will be used in most of the 40 trading strategies in this guide. I recommend you to pay extra attention to this lesson. This is very important.

Imagine having a short-term MA that reacts quickly to price changes and a long-term MA that moves more smoothly. When these two lines cross each other, it can signal a good time to buy or sell. It's a straightforward way to catch trends early and ride them for profits.

How Does It Work?

At its core, the Moving Average Crossover strategy involves two MAs:

• Short-Term MA: this could be a 10-day or 20-day MA. It’s more sensitive to recent price movements.

• Long-Term MA: this might be a 50-day or 200-day MA. It smooths out the price data over a longer period.

When the short-term MA crosses above the long-term MA, it’s called a Golden Cross and is usually seen as a buy signal. On the flip side, when the short-term MA crosses below the long-term MA, it’s known as a Death Cross, signaling a potential sell.

Moving averages help you see the bigger picture by smoothing out all the tiny price fluctuations. This makes it easier to identify the main trend. If the MA is moving up, the market is likely trending upwards, and if it’s moving down, the trend is likely downward. Plus, MAs can act as support or resistance levels where prices might bounce off or break through.

Types of Moving Averages

There are a few types of MAs, but the two most common ones are:

• Simple Moving Average (SMA). It takes the average price over a specific period.

• Exponential Moving Average (EMA). It gives more weight to recent prices, making it quicker to respond to new information.

Each type has its own strengths, and sometimes traders mix them to get better signals.

Using the Crossover in Trading

Here’s how you can use Moving Average Crossover in your trades:

1. Identify the Trend:

   • When the short-term MA is above the long-term MA, the market is in an uptrend.

   • When the short-term MA is below the long-term MA, the market is in a downtrend.

2. Spot the Crossovers:

   • Golden Cross: short-term MA crosses above long-term MA – time to consider buying.

   • Death Cross: short-term MA crosses below long-term MA – time to think about selling.

3. Confirm with Other Indicators:

   • It’s a good idea to use other tools like RSI or MACD to confirm the signals and avoid false alarms.

Practice Exercise

Let’s put this into action:

1. Set Up Your MAs:

   • Open your trading platform (like TradingView or Forex Tester Online).
   • Add a short-term MA (e.g., 20-day SMA) and a long-term MA (e.g., 50-day SMA) to your chart.

2. Spot the Crossovers:

   • Watch for when the 20-day MA crosses above the 50-day MA – that’s your buy signal.

   • Look for when the 20-day MA crosses below the 50-day MA – that’s your sell signal.

3. Make Demo Trades:

   • Use these crossover points to enter and exit trades on a backtesting account.

   • For example, buy when you see a Golden Cross and sell when you spot a Death Cross.

4. Analyze Your Results:

   • Keep track of how often these signals lead to profitable trades.

   • Adjust your MA settings if needed to better fit the market you’re trading.

This is one of the most important indicator that is used in many strategies. So, don't even think of skipping it.