Moving Average Crossover Shocking Secrets

One of the most simplest, highly popular and the most widely used technical indicators after the trendlines is the moving averages. These averages are calculated by adding the prices over a period of time by the time periods. This way,a smoother and a neater curve is obtained. The most important thing while calculating these averages is the time period. The shorter the time period used, the more fluctuations there will be in the curve and more trading signals will be generated. The problem is that most of the time this curve will whipsaw giving losses.

Moving averages can be simple, weighted or exponential. In case of simple, all the prices are treated equally whereas in the weighted and the exponential averages, recent prices are given more weight so that these averages are more responsive to the recent prices as compared to the old ones. These averages tend to smooth out the price action that is more easy to interpret and understand.

Traders use a combination of slow and fast averages in trading. A trading signal is generated when the two cross each other and hence the name crossovers. Now, longer time period averages tend to move slowly and have a long curve that makes them slow in giving trading signals.

Most traders use the combination of three averages. Futures traders use the combination like 4,9 and 18 period averages. Stock traders use longer periods like the 40 day, 100 day and 200 day to generate trading signals. When the short period average crosses the medium one, this gives a trading signal but this need to be confirmed. Confirmation is obtained when the short and the medium move above the longer period average.

When using moving average crossovers as a technical indicator, you should be long when the short average is above the longer period average. And when it is below, you should be short.

Moving Average Convergence Divergence (MACD) is based on these averages and is a powerful technical indicator in the trading arsenal of any trader. These crossovers between the three averages are an indication the momentum is shifting from one direction to another.

These averages work very well in a trending market but do not work well in non trending or choppy markets. However, when trading with these crossovers, you should know this that these averages are lagging indicators. What this means is that they are giving a signal about the past price action something that has already taken place.

Mr. Ahmad Hassam has done Masters from Harvard University. Download this simple 1 Minute Forex Trading System FREE that makes money anytime instantly. Read this shocking 40 page FRWC Brutal Truth FREE report on trading robots.