Moving Average Crossovers
Moving average crossovers are a common way traders can use Moving Averages. A crossover occurs when a faster Moving Average (i.e. a shorter period Moving Average) crosses either above a slower Moving Average (i.e. a longer period Moving Average) which is considered a bullish crossover or below which is considered a bearish crossover.
The chart below of the S&P Depository Receipts Exchange Traded Fund (SPY) shows the 50-day Simple Moving Average and the 200-day Simple Moving Average; this Moving Average pair is often looked at by big financial institutions as a long range indicator of market direction:
Note how the long-term 200-day Simple Moving Average is in an uptrend; this often is interpreted as a signal that the market is quite strong. A trader might consider buying when the shorter-term 50-day SMA crosses above the 200-day SMA and contrastly, a trader might consider selling when the 50-day SMA crosses below the 200-day SMA.
In the chart above of the S&P 500, both potential buy signals would have been extremely profitable, but the one potential sell signal would have caused a small loss. Keep in mind, that the 50-day, 200-day Simple Moving Average crossover is a very long-term strategy.
For those traders that want more confirmation when they use Moving Average crossovers, the 3 Simple Moving Average crossover technique might be used. An example of this is shown in the chart below of Wal-Mart (WMT) stock:
The 3 Simple Moving Average method could be interpreted as follows:
- The first crossover of the quickest SMA (in the example above, the 10-day SMA) across the next quickest SMA (20-day SMA) acts as a warning that prices might be reversing trend; however, usually a trader would not place an actual buy or sell order then.
- Thereafter, the second crossover of the quickest SMA (10-day) and the slowest SMA (50-day), might trigger a trader to buy or sell.
There are numerous variants and methodologies for using the 3 Simple Moving Average crossover method, some are provided below:
- A more conservative approach might be to wait until the middle SMA (20-day) crosses over the slower SMA (50-day); but this is basically a two SMA crossover technique, not a three SMA technique.
- A trader might consider a money management technique of buying a half size when the quick SMA crosses over the next quickest SMA and then enter the other half when the quick SMA crosses over the slower SMA.
- Instead of halves, buy or sell one-third of a position when the quick SMA crosses over the next quickest SMA, another third when the quick SMA crosses over the slow SMA, and the last third when the second quickest SMA crosses over the slow SMA.
A Moving Average crossover technique that uses 8+ Moving Averages (exponential) is the Moving Average Exponential Ribbon Indicator (see: Exponential Ribbon).
Moving Average crossovers are often viewed tools by traders. In fact crossovers are often included in the most popular technical indicators including the Moving Average Convergence Divergence (MACD) indicator (see: MACD). Other moving averages deserve careful consideration in a trading plan:
- Adaptive Moving Average
- Exponential Moving Average
- Triangular Moving Average
- Typical Price (Pivot Point) Moving Average
- Weighted Moving Average
Next Page - Exponential Moving Average
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