How to Trade the Moving Average Crossover

  • August 28, 2018

Watch our video on how to trade the moving average crossover.

What is a Moving Average Crossover & Does it Work?

  • A moving average crossover takes place when a quicker moving average crosses over a slower one. Does it work? More often than not crossovers do signify trend reversals. However, it's important to note that MACD is a lagging indicator and isn't a foolproof indicator. No trading indicators are foolproof.

In this post we’re going to talk about the moving average crossover. Do you know how to implement moving average crossovers in trading? Moving averages according to Investopedia are a widely used indicators in technical analysis that helps smooth out price action by filtering out the noise from random price fluctuations.

There are two commonly used moving averages. They are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).

The SMA or Simple Moving Average is the simple average of a security over a defined number of time periods. The EMA or Exponential Moving Average gives greater weight to more recent prices. In essence, moving averages show trends and can be used at support and resistance (check out our stock market basics page).

1. Take Out Emotions

Moving averages are quite useful when trading. They can take the emotion out of trading because of what they tell you. Traders pay attention to crossovers and treat them as trading signals.

Using the MACD or Moving Average Convergence Divergence in conjunction with the moving averages is a great tool. The MACD follows the trend and shows the relationship between the moving averages.

Basically the MACD takes the difference between short term price trends and long term price trends to anticipate future price movement. There are a few different different moving average crossover plays that happen.

The MACD crossover can tell you whether or not a stock is going to trend in a bullish or bearish direction. It can also keep you from getting into a stock if it’s just a fake out and not a true buy signal. Waiting for a MACD crossover before taking a position on a stock can keep you from getting in or out too early.

It’s especially helpful when you’re about to get into a stock. If you’ve ever been watching a stock and notice that the MACD looks like it’s about to cross but it doesn’t and the stock continues to trend down can keep you from getting in on the fake out and taking a loss. Take our swing trading course to learn more about the MACD.

moving average crossover

2. Basics of the Moving Average Crossover

The moving average crossover that involves price movement is one of the easiest crossovers. It occurs when the price of a stock moves from one side of a moving average to close on the other side. This shows the direction a stock is about to move (how does shorting work? Learn how).

If the price closes above the moving averages, it’s signal that a price reversal to the upside is imminent.  If the prices closes below the moving averages that’s a sign to traders that a downtrend is coming. When the price closes below your moving averages that’s a sign to close out your positions.

Especially if you’re day trading. You can get out with a profit which is always the goal when you’re trading. This is why paying attention to a moving average crossover is a good way to trade without emotion. Following the technicals will help you make smart trades.

moving average crossover

 Highlighted above we see a moving average crossover of $DUST (9 EMA and 20 EMA both crossing above the 50 SMA) - this is an extremely bullish setup. "All we are is DUST in the windddd"

Which Moving Average Crossover is the Best?

  • The moving average crossover of the 9 ema and the 20 ema is one of the best short term trend reversals. A golden cross is a good long term bullish trend reversal. It's when the 50 moving average crosses above the 200 day. Death crosses are bearish reversal patterns when the 50 MA crosses below the 200 day MA.

The 9 and 20 exponential moving average crossover strategy is a great tool. You can add these EMAs to your 1 and 5 minute charts for day trading. This strategy is excellent in helping you determine the direction of a stock and when to get in and out.

When it’s used on the 2 time frames of the 1 and 5 minute charts it’s awesome. When the 9 is over the 20 then price is bullish and the 9 pushes price up. As long as price is above the 9 on the 1 minute chart, staying in a stock is a no brainer.

If price falls below the 9 but the 9 and 20 EMAs are still bullish and haven’t crossed than watching the 5 minute chart can be a great tool in telling you when to get in and out. If price is staying above the 9 on the 5 minute chart then you can make a determination on whether or not you believe you should stay in or get out.

When a 9 and 20 crossover happens and the 20 EMA is over the 9 EMA that is a bearish signal. You should definitely be getting out or if you want to short than you take a position.

You’ll notice that 9 and 20 crossovers happen all throughout the day. In fact, this makes this probably one of if not the best moving average crossover for intraday trading (check out our stock market training page).

1. Swing Trading the Moving Average Crossover

The moving average crossover is a great indication of the direction if you’re swing trading. Use it on the daily chart to show you the trend. The moving averages will tell you what direction the stock is moving.

If you’re holding a stock more than a day, you don’t want to buy a stock that is going against the trend on the daily chart. The MACD is extremely useful for this as well as the moving average lines.

They will show you what direction the stock is headed and you can ride the trend. If you want to learn more about trading take our free stock market courses. We spent hundreds of hours on our courses so that you could save thousands of dollars!

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