The moving average crossover strategy is a scalping strategy which involves the crossing of two moving averages. Before we get into the strategy, lets us understand what moving averages are with respect to trading.
The moving average (MA) is a simple technical analysis tool that smooths out price data by creating a constantly updated average price. The average is taken over a specific period, like 10 days, 20 minutes, 30 weeks, or any time period the trader chooses. A moving average can be set at a specific length. This length will be the number of candlesticks that an average will be calculated from. A 12-period or length moving average will take the average of the 12 preceding candles while a 50-period or length moving average will take the average of the 50 preceding candlesticks.
When using two moving averages for the moving average crossover strategy we use a “slow” and a “fast” moving average. The slow and fast in this case are relative to each other. For example, if you were to use a 12-period and 25-period moving average, the 12-period would be the “fast” moving average while the 25-period would be the “slow” moving average. On the other hand, when using a 5-period and 12-period moving average, the 5-period moving average would be the “fast” moving average while the 12-period moving average would be the “slow” moving average.
For the moving average crossover strategy, we look for a cross between the “slow” and “fast” moving average which gives us a signal for an entry point. You can decide the length of the moving average which can be adjusted in indicator settings however, there are popular lengths such as 10,20,25,50,100 and 200.
Long Position
The entry rule for a long position is simply waiting for the “fast” moving average to cross above the “slow” moving average. This shows that price is in an uptrend therefore a long position would be best.
In the image above, we see a moving average crossover signal. We see the blue line which is a 9-period moving average (fast moving average) cross above the orange line which is a 25-period moving average (slow moving average). This is show at the point marked by the green arrow. A long position opened at that point would be profitable as price moves up.
Short Position
The entry rule for a short position is simply waiting for the “fast” moving average to cross below the “slow” moving average. This shows that price is in a downtrend therefore a short position would be best.
In the image above we see a moving average crossover signal. We see the blue line which is a 9-period moving average (fast moving average) cross below the orange line which is a 25-period moving average (slow moving average). This is shown at the point marked by the red arrow. A short position opened at that point would be profitable as price moves up.
