Moving averages can be a versatile technical analysis tool. Numerous strategies are available for traders using moving averages. One of the most popular strategies is the moving average crossover strategy.
Basic Crossover Strategy
The basic crossover strategy looks at the relationship between the price of a particular currency pair and its moving average. This type of strategy provides a trade signal once the price of a currency pair crosses over a moving average on the price chart. Traders use crossover signals to recognize changes in momentum. Crossovers can also be used as a method of determining when to enter or exit the market. When the price crosses above the moving average it is considered bullish, while a crossover below the moving average is considered a sell signal.
Short-Term vs Long-Term Moving Average Crossovers
Another crossover strategy involves using a short-term and a long-term moving average. This trading signal occurs when the short-term moving average crosses through the long-term moving average. This tells traders that a shift of momentum in one direction is likely to occur in the near future. A signal to buy occurs when the short-term moving average crosses above the long-term moving average, while a sell signal occurs when the short-term moving average crosses below the long-term moving average.
Triple Crossover Moving Average Strategy
Some forex traders will include more than just two moving averages on their charts in order to improve the validity of the trading signal. Many forex traders will include moving averages of five, ten and 20 periods on their charts. When the five-period moving average crosses the other moving averages this will be considered the primary trade signal. Waiting for the 10-period moving average to cross through the 20-period moving average is oftentimes used as a confirmation signal. This helps to minimize false trade signals.
On the other hand, no single technical trading strategy is guaranteed in trading forex or any other financial instruments. The trade signals are only guides as to what may possibly occur. It is also important for traders to consider other perspectives, such as market sentiment or fundamental analysis, when making trading decisions.
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Sources:
http://www.investopedia.com/university/movingaverage/movingaverages4.asp
