Taking Advantage of Moving Average Crosses

Of all the technical indicators, the use of the moving average is the most widespread.  Where only hardcore technical analysts will delve into MACD and the Ichimoku Kinko Hyo indicator, even fundamental investors may come to appreciate the information held within a moving average and a moving average crossover.

What are Moving Averages?

A moving average takes the average price of a security over time and overlays it on a chart to show the trailing average price relative to the current price.  Moving averages can be set with different periods, with some of the most popular being the 25, 50, 100, and 200 day moving averages, while other numbers are used on weekly charts.

In a 25 day moving average, the value of a security during the 25 days prior is added up, divided by 25, and then marked on the chart.  These values are linked and shown as a consistent line, noting the change in price over time.

Moving averages can be very powerful indicators and are used as support and resistance, as well as buy and sell indicators when a moving average crossover appears.  A moving average crossover, however, requires the use of multiple moving averages.

The most important moving average crossover comes from two moving averages set on a 50 and 200 day moving average.  When these two moving averages cross, it is known as a “Death Cross” and routinely predicts massive selloffs in the market until the next cross denotes a buying opportunity.  This “Death Cross” was most recently made famous in 2000, when it correctly timed the death of the internet and technology stock bubble.

Moving Average Crossover

A moving average crossover occurs when two moving averages of differing periods intersect and then continue to move in opposite directions.  Traders consider the crosses to be alternating buy and sell signals.  That is, when a moving average crossover appears the first time, it may be a sell signal.  The next moving average crossover, then, would be a buy signal.

Reading a moving average crossover is very easily done.  When the moving average crossover occurs, it must hold for one period after the cross, at which point it signals that either a long or short position should be opened.

Crossover Strategy

There are two ways to play a moving average crossover.  Some investors choose to read a moving average crossover as a pure buy and sell, and they open and close positions each time a cross is made.  Others buy and sell on the moving average crossover, but instead of holding until the next cross, they sell at a predetermined take profit price.

Make It Your First Indicator

Many beginning traders are first exposed to the moving average crossover before other technical indicators because it is accurate, easy to use and understand.  If you're new to trading or technical analysis, the moving average crossover is an excellent way to break into the technical analysis science.  Regardless of its simplicity, the moving average crossover is an excellent and profitable indicator for a trader of any type.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

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