What Is a Moving Average Crossover and How Does It Work?

crossing moving average strategy

The first type is a price crossover, which is when the price crosses above or below a moving average to signal a potential change in trend. A five-day simple moving average (SMA) adds up the five most recent daily closing prices and divides the figure by five to create a new average each day. Each average is connected to the next, creating the singular flowing line. In an uptrend, a 50-day, 100-day, or 200-day moving average may act as a support level, as shown in the figure below. This is because the average acts like a floor (support), so the price bounces up off of it.

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In this NZD/USD H1 chart above, the market was ranging, so the right thing was to ignore all moving average crossovers that occurred inside the range. As you can see, when the 20 simple moving average crossed back below the 50 simple moving average, the trend changed direction. In this example, I have the Australian dollar against the US dollar, daily timeframe. The 10 moving average is in red, while the 20 moving average is in blue. As you can see, the red moving average has crossed both above and below the blue moving average. Let’s use the backtester we’ve built to test different moving average crossover strategies on the S&P 500 (SPY).

Guppy Multiple Moving Average

Using the crossings of two Moving Averages to trade in a trading strategy is a Trend-Following approach. As the name would suggest, to be successful, it requires the asset to be on-trend. The 10-day EMA crossing over the 30-day EMA below the 50-day EMA can be a potential signal of a reversal in the longer term trend from down to back to an uptrend. The benefits of using an EMA compared to a simple moving average is that you are likely to receive a signal that is more in tune with current price action. This moving average trading strategy uses the EMA, because this type of average is designed to respond quickly to price changes.

  • That’s not to say you can’t trade a ranging market using a different strategy, but you should ignore the moving average crossovers until the price can break above resistance or below support.
  • Generally trends are either upward or downward, as sideways movements are considered consolidation and not trends.
  • Some trends are short-lived, while others last for days, weeks, or even months.
  • In some cases, this may be good, and in others, it may cause false signals.
  • You’ll see how other members are doing it, share charts, share ideas and gain knowledge.

This is the example provided by the zipline algorithmic trading library. Thus if we wish to implement our own backtester we need to ensure that it matches the results in zipline, as a basic means of validation. Once you’ve identified that the market is not trending and is stuck in a range, draw the support and resistance levels at the boundaries of the range. As you can see in the chart, when the 20 simple moving average crossed above the 50 simple moving average (golden cross), we had a good buying opportunity. Generally, using two or more moving averages helps you to get a broader idea of the market structure and market trend. Founded in 2013, Trading Pedia aims at providing its readers accurate and actual financial news coverage.

Can We Use Other Moving Averages?

Well, you can enter your trade at the close of the candle that made the breakout and place a stop loss a little bit far away from the support level. Once these levels are drawn, ignore all crossover signals https://traderoom.info/ that form inside of these boundaries because they are more likely to be false signals. When using more than one moving average on a chart, each one will indicate a different trend in the market.

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By the time an 89-day MA curves upward or downward to confirm a trend, the market has already exhausted a part of that move and may even be nearing its end. Sure, a 20-day moving average will reflect price movement in a swifter manner, but it will still lag behind. And although exponential averages speed up signals, all MAs join the trading party too late. This is why traders do not base their trading decisions solely on moving averages and generally wait for the strongest possible signals they generate – crossovers. The Guppy multiple moving average (GMMA) is composed of two separate sets of exponential moving averages (EMAs).

Market Breadth Indicators

Would using the ADX indicator to determine if the market is trending nor ranging be a good filter criterion to add to improve the strategy? Note that in early March, the orange and green moving averages commingled crossing back and forth without clear separation between the two. Think of the fast-moving average as the signal line, we act when it crosses the other moving averages.

crossing moving average strategy

As can be seen the strategy loses money over the period, with five round-trip trades. This is not surprising given the behaviour of AAPL over the period, which was on a slight downward trend, followed by a significant upsurge beginning in 1998. The lookback period of the moving average signals is rather large and this impacted the profit of the final trade, which otherwise may have made the strategy profitable.

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