How to Trade a Moving Average Crossover

A pair of moving averages is one of the most common indicators used in trading. With this indicator, the trader uses a long period moving average and a short period moving average in an attempt to spot changes in the market trend. The general strategy is to enter the market on a moving average crossover in order to get in at the beginning of a trend. Traders often use exponential moving averages rather than simple moving averages. The reason for this is that exponential moving averages give greater weight to more recent price data, so they follow short-term price movements more closely.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• trading software
• broker
• trading capital

1. Plot the moving averages on your price chart. It's a good idea to make the moving averages different colors so that you can easily spot crossovers.

2. Buy on a bullish crossover. This occurs when the shorter period moving average crosses above the longer period moving average.

3. Sell on a bearish crossover. This occurs when the shorter period moving average crosses below the longer period moving average.

4. Use trading volume to confirm a crossover. Conventional wisdom states that moves occurring on large volume have more significance than moves occurring on low volume.

5. Adjust the time periods of the moving averages if necessary. The standard periods for short-term exponential moving averages are 26 days and 12 days, respectively. However, if you play around with the time periods, you may be able to get the moving averages to fit the price data of a given market more closely.

Tips & Warnings

• Use a stop-loss to lock in profits and limit losses.
• Never trade with money you can’t afford to lose.

Resources

• Investopedia: Exponential Moving Average