Moving Average Crossover Shocking Secrets

Moving averages are one of the simplest and the most popular technical indicators that can be used in any market. While using averages, the length of time used to calculate them is very important. Moving averages with shorter time periods fluctuate more activley and tend to give more trading signals. Shorter time period moving averages tend to whipsaw a lot that can cause 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.

Now, longer time period averages tend to move slowly and have a long curve that makes them slow in giving trading signals. 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.

Most traders use the combination of three averages. 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. 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.

Now next to trendlines, moving averages are the most widely used technical indicators. So when using moving average crossovers, when the short period average is above the long period average, you should be long. Similarly when the short period average is below the long period average, you should be short.

The crossovers of these short and longer averages provide the trading signal to act as they indicate that the momentum is shifting from one direction to another. Moving average crossovers are an important tool in the arsenal of any trader. Moving Average Convergence Divergence (MACD) one of the most popular indicator depends on them.

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. These averages work very well in a trending market but do not work well in non trending or choppy markets

Tags: business, currency trading, Day Trading, etfs, finance, Forex Links, investing, money, mutual funds, retirement, stocks, trading