Moving Average Crossover Strategy

Moving Average Crossover Strategy
Moving Average Crossover Strategy

The classic Moving Average Crossover is also the simplest, and most widely known. As it is so simple, there are many variations of this classic method.

Setup

It involves two moving averages: one fast, and one slow. Many people use the 30 day simple moving average (fast), and the 100 day simple moving average (slow).

Moving Average Crossover Strategy

Moving Average Crossover Strategy

Entry

Buy when the fast moving average crosses up and above the slow moving average.
Sell when the fast moving average crosses down and below the slow moving average.

Exit

Close the buy trade when the fast moving average crosses below the slow moving average.
Close the sell trade when the fast moving average crosses below the slow moving average.

Or

Exit when your trailing stop loss has been hit.

Currency Pairs

Any

Time Frame

This method is most profitable with a daily chart. However, as forex is a 24 hour market, different brokers have different starting and ending times for their daily bars. I recommend using 8:00am EST (New York time) as the start time for a daily bar. Why? Because 8:00am – 12:00am EST is the generally the busiest and most volatile market hours of the forex market.

Variations of the Double Moving Average Crossover

Moving Averages

Each currency pair has its own behaviour. The standard 30 & 100 SMA may not necessarily be the best one for your currency pair. Other combinations include 28 & 100, 10 & 25, 5 & 8, 14 & 50, 13 & 100.

Others also use a Simple Moving Average for the slower MA, and the Exponential Moving Average for the faster MA. This is more sensitive to price action, and result in signals sooner.

Stop Loss

There is no hard and fast rule for stop losses in this strategy, but I suggest using the latest swing low for a BUY trade, or the latest swing high for a SELL trade. Use this as the initial stop loss level.

As the moving averages are a lagging indicator, instead of closing a trade at the next crossover, I recommend using a trailing stop loss. Waiting for a crossover can lead to smaller profits, or bigger losses.

Trailing Stop

Trailing Stop

Pros

Works well in a trending market.

Cons

Doesn’t work well in a ranging market. This method tends to result in frequent false signals when the market is moving sideways.

Forex Ranging Market

Forex Ranging Market

Backtesting

link -> backtesting results

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