Now that you know how to plot the moving averages on your chart and determine whether the market is in an uptrend or a downtrend, it’s time we showed you when to get in AND when to get out on your trades.
But before we dig more into that, it’s super important to note that moving averages can also determine when a trend is about to end and reverse.
Read that again.
It is a very important piece of information that shapes the direction of the rest of this blog, and potentially your future trading strategy.
Moving averages can also determine when a trend is about to end and reverse.
As you already know, there is no secret formula to calculate how long a specific trend will last. Some are short-lived, while others last for days, weeks, or even months.
So how can you go on about predicting a trend reversal? And is it even possible at all?
Moving Average Crossover.
Moving average crossover is a technical tool in forex that occurs when two different moving average lines cross over one another, and can therefore help forex traders identify when to enter or exit trades.
It is important to remember that moving averages are a lagging indicator so the crossover technique may not capture the EXACT top and bottom of the trend. However, it can definitely help traders identify the bulk of a trend.
A moving average crossover technique helps forex traders answer the following questions:
And the best thing about it? It does it all by itself!
All you have to do is drop a couple of moving averages on your chart, grab a beer, and wait for a crossover.
If you’re lucky enough and the moving averages cross over one another, it could signal that the trend is about to change soon, giving you the chance to get a better entry.
By having a better entry, you have the chance to bag more pips!
By bagging more pips, you have the chance to buy a luxury seat and add it to your matching car and speedboat collection.
Essentially, there are two main types of Crossovers.
Here we need two moving averages with different periods. When the MA with a smaller period crosses the MA with a more significant period bottom-up, it’s a buy signal.
Inversely, if the MA with a smaller period breaks below the MA with a more significant period, it’s a sell signal.
To make things super duper clear, let’s take a look at one more example. This time we will use a 6-monthly chart of USD/GBP
You can see that we plotted two moving averages, a 50-day moving average and a 200-day moving average.
Notice, the MA with a smaller period crossed the MA with a more significant period which we now know is a buy signal!
So if you were to go long at the crossover of the moving averages you could make yourself some mad pips!
But of course, not every trade will be a thousand-pip winner, a hundred-pip winner, or even a 10-pip winner.
It could be a loser, which means you have to consider things like where to place your stop loss or when to take profits.
Don’t just go jumping in without a plan!
In the next lesson, we will look more into how Moving Averages work with the Support and Resistance levels and how this can help your overall trading strategy.