moving average crossover strategy to enter trades

Moving Average crossover strategy in forex is where you take a trade when one moving average crosses over the other. You can use two or more moving averages on the chart.

Previously, we learnt how to use moving averages to find trend and price momentum. Now we will turn our attention toward the moving average crossover strategies.

You can have crossovers between the fast moving averages and the slow moving averages. 

One is considered a fast moving average when you use smaller number of periods hence reflecting more of the current market price.

On contrary, the slow moving average contains  larger number of periods and therefore reflects more long term movement and less of the current market movement.

Therefore, you will look for trading signals when one moving average crosses over the other.

How to trade moving average crossover strategy in forex

When trading a moving average crossover strategy in forex, you should look first  at the fast moving average.

It reacts fast to current price movement therefore, will show you what direction the market could be turning. The slow moving average will always follow after the fast moving average.

A crossover happens when the slow moving averages catches up with the fast moving average.

So when do you buy / sell when trading cross overs?

When the faster Moving Average crosses the slower Moving Average from above, it gives a sell signal. You can sell.

Alternatively, when the faster Moving Average crosses the slower Moving Average from below, it  gives a buy signal. You can buy. 

  let’s have a look at the Moving Average cross over as indicated on the chart below.

When you take a look at the above chart, you will realize that every time there is a crossover, we see a shift in the direction of the trend.

There fore Moving Average crossovers are not only used to identify trade signals but also to determine trend  reversal points.

So in case you are having an open position and you notice a Moving Average crossover , it is a warning that a trend may come to an end. Take a chance to exit trade.

For buy signals,

On our first buy position(Buy 1), the fast moving average(Red) crossed the slower moving average(Green) from below, and moved up below the price. Hence a buy signal. You can scroll and take a second look. The same happened on Buy 2.

For the sell signals,

Sell 1 and sell 2, check. the red moving average(fast) crossed the green moving average(slow) from above, and moved down next to price. Hence sell signal.

Important to note

3 things that happen when there is moving Average crossovers

  1. change in price momentum,
  2. position of moving averages
  3. Short/long change in price direction. 

The fast Moving Average has a tendency of making many fake out signals but when combined with a slower Moving Average most of the error is corrected. 

Let’s have a look at another example below.

On the chart below, the cross overs are the entry signals and the immediate highs/lows are the stop loss levels

More so,the moving average crossovers work better in volatile/trending markets than  ranging market sessions.

With ranging markets it tends to pose a lot of crosses which are likely to be fake outs and may lead to premature losses when traded.

Therefore the better way to trade moving average crossovers is to combine it with other technical analysis patterns like candlesticks, momentum indicators ,trend line or Fibonacci retracements.

Like any other strategy,

know how to set your stop levels to help you limit losses in case a trade fails.  Also set reasonable profit targets. We will learn more about risk management in the later session

As you can see, it is a big deal when the market is trending than when ranging. It is always important to know when to trade. That way, your startegy will become a wholly grail.

 Moving average crossovers are a reliable trading strategy, but only in trending markets.

With sideways trends or during market ranges, they produce many crossover signals but most are false signals.

If you take trades with crossovers when price is ranging, you have to watch them closely, otherwise you will get hit out so fast.

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