You have learned how to use moving averages to identify trends, compare simple vs. exponential moving average, but how do you use moving average crossovers?
Moving average indicator has several main functions.
To identify trends, to be dynamic support and resistance, and to determine reversal patterns.
Many traders use moving average crossover traders to estimate the momentum of price changes in the market.
When the Moving Average indicator gives a predetermined signal, the trader will try to interpret the sign that will appear when there is a change in price movements in relation to the momentum or change in direction of the price movement.
Now we will try to review how to use moving average crossovers, stay tune with TenkoFX.co.za
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Learn to trade using moving average crossovers
Moving Average Crossovers are the intersection points between two Moving Average lines.
This crossing point is a signal to determine the entry point, ideally, this is a trend reversal pattern.
How to attached and how to use MA Crossover, including easy.
So it becomes one of the favorite indicators for beginners and those who are more experienced.
Attach MA Crossover
To use Moving Average Crossover, you must first attach two Moving Average indicators on the chart.
Into the Currency Pair and timeframe of your choice.
For example, the picture shows a USDJPY chart with daily timeframes with MA 10 (blue), MA 20 (red).
Variations in the Moving Average combination that you attached can use any period.
Don’t forget to choose different colors so that the MA Crossover will be easier to identify on the chart.
In this example, we cite the Simple Moving Average 10 and 20 only for practicality purposes, to show how the MA Crossover can be used to determine entry.
How to attach a moving average indicator you already understand, on the MetaTrader 4 platform you click insert -> Indicator – >> trend – >> moving average.
After a new window appears, you can edit the selected period and other settings.
Take a look at examples of USDJPY pairs using the daily timeframe below.
Moving average crossovers explained
At the beginning of the USDJPY trend pair in a strong uptrend, the pair was in a good upward trend from April to July.
The movement of the trend reaches around 124.00 which is the resistance zone, before slowly heading down.
In mid-July, we see that SMA 10 crosses below SMA 20.
Then you see what happens, sweet downtrend, if you open short in that condition it will get thousands of pips or hundreds of pips.
But not always the price movement will reach thousands of pips, sometimes it can only be hundreds of pips or dozens of pips.
And it’s not always a signal that this crossover will provide profit, sometimes loss may you have to accept it.
And for this, of course, you can’t trade without planning, however, stop loss or risk management is the best way to anticipate caused by fake signals that might come.
Set stop loss and profit target
Then how do you determine the target profit and place a stop loss?
There are no special rules that require traders to set profit and stop-loss targets within a specific distance.
Some traders close their positions after a new crossover is made or once the price moves against the position, with a predetermined target amount.
You can exit when a new crossover is created, using a 150-pip stop loss distance just in case.
Because you don’t know when the next crossover will appear, you might hurt yourself if you wait too long, so place a profit target at a ratio of 1: 1 from your stop loss.
One thing to note with crossover systems is that although they work beautifully in a turbulent trend environment, using MA crossovers does not work well when the trend starts.
You will get lots of crossover signals and you can stop a few times before capturing the trend again.
Example trading moving average crossovers
For example in the image below, we will use the SMA indicator (simple moving average) 13 and SMA 100 on the GBPUSD pair with a 1-hour timeframe.
This is just an example, you can use another period for example 10 and 20 then choose a timeframe that you think provides the best analysis.
In the example above you find four times faster MA crosses to the slower MA
Trading method using moving average crossovers is if the faster MA crosses the slower MA from the bottom to up, this is a buy signal, conversely, if the faster MA crosses the slower MA from top to bottom then this is a sell signal.
But from this example we take a conclusion, the MA crossover will give a signal that is not static and must be analyzed by traders manually.
This flexibility makes MA crossovers much more adaptable to changing market conditions and market trends so that the MA indicator can be very useful as a trading option.
Moving average crossovers in sideways
We take the example of the AUDUSD pair with a 1-hour timeframe, take a look image below.
In the hourly chart of the AUD / USD pair above, we can see that for almost three days the price has moved between the 0.9319 and 0.9338 areas.
Where the MA 13 indicator in red is below the yellow MA 100 indicator.
Prices move around and fluctuate between support and resistance levels (shown as a gray area on the chart).
Where the MA 13 indicator is in the consolidation area.
MA is not an indicator of price action that will give a signal for the future.
So it takes an effort to wait from the price to make a breakout movement.
And eventually, on April 4, the price was seen moving suddenly surging.
Which quickly caused the SMA 13 to spike up and finally rose across the yellow SMA 100.
And after the price continued to move strongly rallying, finally reaching the level of 0.9179.
In this scenario, the MA crossover gives a buy signal after the consolidation or sideways period has ended.
You can open buy orders with a stop loss below the support and set a profit target.
From this example, we draw the conclusion that the sideways moving average does not provide a signal so it requires patience to wait for a breakout.
Advantage and disadvantage moving average crossovers
- + It provides trading signals that are easy to understand by crossing two moving averages.
- + It provides clues as to whether trending is strong or sideways by paying attention to both MA.
- + You can use it with any timeframe and any trading style.
- – The two moving average crosses provide signals that are often delayed, so you might lose a few pips before a crossover signal occurs.
- – The existence of fake signals that may often occur, especially at low timeframes.
Final Thought
Using moving average crossovers is a trading method that is widely used by traders both on the forex and crypto markets.
The method of trading using moving average crosses is simple and easy to understand way for traders.
So this method is widely tried by novice traders.
But as with most indicators, nothing is perfect.
Signals from moving average crosses tend to be delayed since the reversal started.
So you will be late to wait for the crosses to occur.
Even so, it is still possible to get profit if the way to determine when to exit on time.
This method will be more suitable if for long-term trading.
But less effective if for short-term trading because fake signals will often appear.
In addition to how to enter the market with MA crossovers.
You must also need to use stop-loss management risk as anticipation.
As you experience using this method, you will likely be able to win, as Khabib Nurmagomedov defeated Mc Gregor.
Next, we will discuss the moving average function to determine dynamic support and resistance, stay tune with TenkoFX.co.za.
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