Want to learn to quickly spot a trend? Look no further than the good old moving average. The most basic type is one where an asset price moves from one side and closes on the other side of a moving average. Many traders use this is a basic exit or entry strategy.
Moving averages come in all shapes and sizes. You can use a 5-day moving average or a 200-day moving average. These averages don’t necessarily have to be in days, either. For example, you can trade off of a five-minute chart using a 20-period moving average in which case the average is determined by the last 20 five minute periods.
A moving average (MA) crossover strategy is very popular and very simple. In fact it tends to be favored by many traders because it actually takes away all emotion in trading. You and I know that is what messes many traders up.
One of the most common MA crossover strategies is the 9 and 18 crossover.
It goes like this:
- When the 9 period moving average crosses above the 18 period moving average, look for longs or exit shorts.
- When the 9 period moving average crosses below the 18 period moving average, look for shorts or exit longs.
The idea here is that the short MA crossing above or below the long MA will give you a good idea on near-term trend. Having a clear picture of the near-term trend can potentially help you stay on the right side of the trade.
Of course; if trading were this easy everyone would be day trading from the comfort of their own yachts in the Caribbean or Mediterranean.
This strategy simply provides a good basis from which to work. A solid risk management and trade management plan must also be considered.
The moving average crossover can be utilized with different average lengths such as 5/10, 10, and 20. In addition, it can also be utilized with different types of moving averages such as simple or exponential.