Moving averages can be used to generate signals for possible trade entries with simple price crossovers. So if price closes above the moving average (in a bearish tending market) and then moves back below it, you have a sell signal. If price closes below the moving average (in a bullish trending market) and then moves back above it you have a buy signal.
So the first job is to identify if the market is bullish or bearish in the particular time frame which you are trading. In the examples below the green dotted line is the 200 SMA and this is what we are using to establish the direction (trend) of the market. If price is above the 200 moving average traders will be looking to buy and if the price is below the 200 moving average traders will be looking to sell. This is what's called trading in harmony with the market, remember never try to fight it.
Then the blue line is a 50 SMA which is the point where we wait for price to penetrate which will generate our signal.
If you have price above the 200 SMA and price crosses below the 50 SMA, this would be consider against the overall bullish trend of the market and ignored as it would only suggest a pull back or retracement within the overall up trend. So you wait...
When price moves back above the 50 SMA, the market is now continuing it's bullish trend allowing traders to buy in harmony with the overall market trend.
Again as in our first example if you have price below the 200 SMA and price crosses above the 50 SMA, this would be consider against the overall bearish trend of the market and ignored as it would only suggest a pull back or retracement within the overall down trend. So you wait...
When price moves back below the 50 SMA, the market is now continuing it's bearish trend allowing traders to sell in harmony with the overall market trend.
We have used the line chart to display the price, as it cuts out a lot of the noise of the market and gives a much clearer end of day price crossovers, this is the black line.
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.
Return from Price Crossovers to Trading Stategy