Exploring How to Trade the Double Moving Average Crossover
The idea of using a moving average (MA) to determine whether a long-term price trend is going up or down has been something that trading strategists have used for decades.
In this article, we look at the double moving average crossover, which provides a fairly straightforward indication as to the direction of the security.
Double Moving Average Crossover Described With this indicator, investors can look at either long-term or short-term trends.
The longer-term trend would be indicated when looking at the 50-day simple moving average crossing over the 200-day.
The shorter-term trend would be indicated by the 21-day simple moving average crossing over the 50 day.
Although an investor can use any two MA's he or she desires, those outlined here are the most common.
For those who want to know, calculating simple MA's is quite easy.
For the 21-day average, all you need to do is add up the closing price for the past 21 days and divide it by 21.
The same process holds for the 50 and 210, but of course you would the last 50-day closes for the 50 and divided it by 50, and so on for the 210-day.
Trading the Double Moving Average Crossover The biggest problem with trading any MA crossover indicator is that it is based on historical information.
This means that they are proactive indicators.
Why should you care? Since they are lagging indicators, the underlying security price will have already started its climb or drop.
This means you can never "get in" at the absolute bottom when trading using the double MA crossover as a trading trigger.
However, trading using the MA crossover is better than trading on price crossing over a particular moving average because single-day stock price fluctuations can be heavily influenced by market forces and will therefore trigger false trading signals.
Since moving averages are more "smoothed" out since they historical data that is made up of at least 21 days of data (or less if you use a customized average), they are more reliable and therefore safer to use as mid- to long-term trading decision helpers.
Word of Caution Trading the double MA crossover can certainly yield positive results.
However, the right circumstances need to exist for this trading indicator to have much value.
Ideally, trading this indicator works best during properly trending markets.
During periods of heightened volatility and erratic market or stock price behavior, the double moving average crossover will hold less weight and as a result investors need to be cautious about using this indicator alone, or at all, during those periods.
In this article, we look at the double moving average crossover, which provides a fairly straightforward indication as to the direction of the security.
Double Moving Average Crossover Described With this indicator, investors can look at either long-term or short-term trends.
The longer-term trend would be indicated when looking at the 50-day simple moving average crossing over the 200-day.
The shorter-term trend would be indicated by the 21-day simple moving average crossing over the 50 day.
Although an investor can use any two MA's he or she desires, those outlined here are the most common.
For those who want to know, calculating simple MA's is quite easy.
For the 21-day average, all you need to do is add up the closing price for the past 21 days and divide it by 21.
The same process holds for the 50 and 210, but of course you would the last 50-day closes for the 50 and divided it by 50, and so on for the 210-day.
Trading the Double Moving Average Crossover The biggest problem with trading any MA crossover indicator is that it is based on historical information.
This means that they are proactive indicators.
Why should you care? Since they are lagging indicators, the underlying security price will have already started its climb or drop.
This means you can never "get in" at the absolute bottom when trading using the double MA crossover as a trading trigger.
However, trading using the MA crossover is better than trading on price crossing over a particular moving average because single-day stock price fluctuations can be heavily influenced by market forces and will therefore trigger false trading signals.
Since moving averages are more "smoothed" out since they historical data that is made up of at least 21 days of data (or less if you use a customized average), they are more reliable and therefore safer to use as mid- to long-term trading decision helpers.
Word of Caution Trading the double MA crossover can certainly yield positive results.
However, the right circumstances need to exist for this trading indicator to have much value.
Ideally, trading this indicator works best during properly trending markets.
During periods of heightened volatility and erratic market or stock price behavior, the double moving average crossover will hold less weight and as a result investors need to be cautious about using this indicator alone, or at all, during those periods.
