Forex Trading Strategies - Moving Average Crossover Strategy
Updated: Oct 29
Moving averages are popularly used in the Forex market by the technical analysis as the technical indicators. In modern days, they have become a major factor in the creation of trading strategies because they are very easy to use during the technical analysis.
The moving average crossovers have been used for a very long time by many Forex traders, and they have been easily tested, measured, and applied for a very long time. This has made them the basis for the foundation of the modern trading strategies that most traders in both the fundamental and technical analysis.
A moving average allows you to reduce the amount of the “noise” on the Forex price chart. If you look at the direction of the moving average, you can be able to get the basic idea of how the prices are moving. If it is angled up, the price is going up overall, price going down, angled up, moving sideways and the price is usually in a range.
A moving average can also be used to provide resistance or support. In an uptrend, 50-day, 100-day and maybe 200-day moving an average.
The Crossover Concepts
The crossovers concept is that it is a short-term crossover moving average more than the long-term moving average is an upward momentum indicator in the stock. The short-term average trading that is below the long-term average.
The types of Moving Averages
There are various ways in which you can calculate the moving averages, for you to become one of the most competent Forex traders you need to understand the types of the moving averages. This section of this article provides various types of moving averages.
The simple moving average (SMA)- this is the type of the average that can be used to add up the previous and most recent daily closing prices, and it divides it into groups of five to create a new average on every day. You connect every average to the next average; thus, in the end, you come up with a singular line.
The Exponential Moving Average (EMA) is the second type of the Moving average you should be aware of. It is usually different because it has more complex calculations since it applies more weighting on the most recent prices.
To prove this, you can perform a particular test where you can put a 50-day SMA and a 50-day EMA on one chart. If you do so, you will notice that the EMA acts quickly towards the changing prices compared to the SMA because of the additional weighting on the recent data price.
The charting software and the platform for trading perform the calculation, hence you are not required to do any manual math to determine the moving average. There is usually no moving average that is better than the other. The EMA is better in the financial markets or stocks for a given period of time, and in some time, the SMA performs the work better than the SMA.
You will realize that the time frame used in choosing the average also contributes to every moving average function's significant role.
The Length of the moving Average
The most popular lengths of the moving average include 200, 200, 50, 20 1st 10. You are always free to apply this length of the moving average in any given chart time frame, whether it is weekly, daily, monthly or any time that you would like. All these factors are dependent on your time horizon.
The length of the moving average is also known as the time frame. In financial trading, the length that you select for your moving average is also known as the "lookback period, and it can be used to play a big role in how effective it is.
However, in the moving average, the shortest time frame is likely to react much quicker compared to the price changes compared to any MA that has a long period of look back.
The Limitations of the Moving average Crossover Strategy
One of the main drawbacks of the moving average crossover is that the traders calculate the Moving average using the historical data, and in its calculation, it does not have any calculation that is predictive in nature.
This means that if you use the Moving average crossover, the results you obtain are likely to be random. In sometimes the Forex market tends to respect the Moving average resistance or even the moving average resistance while this is the similar case of the indicators where they might not show respect to the indicators.
Another problem is that the price action tends to become a bit choppy, and the price is likely to swing forward and backwards, giving out different trend trade signals. If this happens, as a trader, you should always seek to step aside and implement another indicator that will help you to clarify the trend.
This scenario can occur with the Moving average crossovers every time the moving averages get tangled up for a particular time, causing multiple trading losses.
The moving averages usually work well in powerful and trending conditions; however, they are poor in ranging or poor conditions. Adjusting the time frame can solve this problem even if it is temporality, even if sometimes n these issues are likely to occur regardless of the length of the Moving average that is selected.
The moving averages can simplify the data price by just smoothening it, and it creates a single flowing line. This allows the traders to be able to see the trend very quickly and easily.
The Exponential Moving averages are faster, and it reacts very fast to the changes in the prices compared to the other moving averages. In most cases, this makes it better, and in other scenarios, it has its drawbacks because it can cause false signals.
The moving averages that have a shorter length or look back period respond quicker to the prices' changes than the moving average with longer lookback periods.
The moving average crossovers are among the most popular strategy that can be used for both the exits and the entries. The moving averages can also be used to highlight potential resistance or resistance.
This appears to be predictive because the moving average is always dependent on the historical data, and it simply shows the average price in a given period.
To invest using the moving average, or any other technique, you need an investment account with the stockbroker. You should conduct adequate research on the best stockbroker to create an account with.