Moving Average Crossover
Three moving averages can be used to generate what are called crossover signals which many traders will use to time their trades.
First traders use a long term moving average to establish the direction (trend) of the market. In our examples here the green dotted line is the 200 SMA. When price is above this we can consider the trend as up and when price is below this we can consider the trend as down.
Then the idea is you take two moving averages, one of which would be considered a short term moving average, in the examples here the red line is a 10 SMA. The other which would be considered a medium term moving average, in the examples here the blue line is a 50 SMA. When the short term moving average crosses the medium one this would indicate an entry point signal. When the short turn moving average (red line) moves back across the medium term moving average (blue line) this would indicate the exit point.
Many traders will ask "which moving averages shall I use?" and there are a lot of different combinations of
that you can use to generate your trade signal. There isn't a right or wrong answer to this apart from which ever ones work for you are the right ones.
A bullish crossover is when the shorter moving average (red line) moves above the medium one (blue line) to indicate a buy signal as you can see in the example below. When it moves back across this would indicate sell signal for your trade.
A bearish crossover is when the shorter moving average (red line) moves under the medium one (blue line) to indicate a sell signal as you can see in the example below. When it moves back across this would indicate buy signal for your trade.
Although this might work well in a strong trending market, when the market is showing no or little direction this can generate many entry signals that if taken would only result in losing trades so be careful. Make sure that you work with this method for a while on a demo account until you understand it fully before you try it out live.
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