y plotting some moving averages on your chart, you determine the trend, but what more can those averages show you?
They can help you define if the trend is about to end and reverse.
It is important to know when to get in and when to get out from a trade.
When you observe the general direction of the price over the short, immediate, or long term, you can suspect if the trend will be short-lived or it will go for months.
However, you can’t be sure how long a specific trend will last, so by using this new tool (a moving average crossover), you will be able to decide when to get in and out.
It occurs when two different moving average lines cross over one another.
Let’s not forget that the moving averages are a lagging indicator, which means that it might not show you the exact tops and bottoms.
Simply put, a moving average crossover system helps to do the following:
- Identify which direction might the price be trending?
- Determine where might be a potential entry point for a trend trade?
- Suggest when might a trend be ending or reversing?
What happens if you plot a couple of MAs on your chart and you notice a crossover?
If you read the signal that the trend is about to change soon, you will have the opportunity to get a better entry.
And by better entry, we mean more pips directly coming your way!
Let’s look at a daily chart of USD/JPY and try to identify what possible crossovers are signalling.
What is easily recognisable is that from around April to July, the pair was in an uptrend.
But when it reached 124.00, it started going down.
Is it a coincidence that it happened exactly when the 10 SMA crossed below the 20 SMA?
No! The crossover gave you a signal that the trend could be changing.
And the downtrend!
If you got the signal right and had shorted at the crossover, you would have entered a very successful trade and it would have made you almost a thousand pips.
However, this won’t be the case every time!
You can’t be sure that the direction won’t take an unexpected turn and go against you! Therefore, it is of high importance to not enter a trade without placing a stop loss!
As the saying claims: “You shouldn’t put all your eggs in one basket!”
Some traders use a strategy where they close their positions after they detect a new crossover or they close it when the price moves against the trade with a certain amount of pips.
If you wait too long after the crossover, you might end up losing money, because you simply won’t know when the next crossover will be.
The reason for this is you just don’t know when the next crossover will be. You may end up hurting yourself if you wait too long!
Remember, crossover systems work perfectly when the market is volatile, but they are not designed to function in a ranging market, because you will get many crossover signals and get stopped out multiple times before you find the next trend.
To review, you need to use a moving average crossover system to identify the emerging or ending trend to find a better entry or exit point! Some triggers will help you to predetermine these points, but we will talk about them later on!