The crossover of moving averages

One of the most used tools in forex trading is the crossover of the moving averages. The advantage of using the moving average is its simplicity. In a crossover, the signals do not come from the price behavior compared to its average, but from the behavior of the two moving averages. In this way, many false signals can be discarded.

The moving averages used for a crossover usually have the following characteristics: the short-term moving average is indicative of 15 or 21 periods; the long-term moving average of 100 or 200 periods. The number of periods is only indicative, because there is no a “rule of thumb”. A trader must always size it based on the type of market (volatile or not) as well as the timeframe he is using (reliability increases with the timeframe). Traders who use crossover as a trading strategy usually follow the following approach. When a short-term (or “fast”) moving average crosses from bottom to top, the long-term (or “slow”) one, the intersection is interpreted as a buy signal. The stop-loss is usually set to the low of the last candlestick preceding the crossover, while the take-profit is usually equal to the exposure linked to the stop-loss. The position is maintained until another crossing is observed, even if this method of exiting the position may be slow, whereas when a short-term moving average crosses the long-term one from above , the intersection is interpreted as a sell signal. The stop-loss will be set to the high of the last candlestick before crossing.

The use of two moving averages with different speeds allows a trader to observe more clearly the dynamics of prices, both for the acceleration of their movement and for their trend. The double moving average is faster action, ie much more sensitive to changes in the market trend than a traditional moving average. This eliminates some of the delays associated with traditional moving averages. Usually, among the advice given to traders who use crossovers, there is the one of using a timeframe starting from H1, because, in doing so, false signals are eliminated and gains are increased. Furthermore, it is not recommended in the lateral market phases, as these alter the moving averages and, consequently, false signals increase.

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