So far, you’ve learnt how to determine the trend on your charts by charting some moving averages. Moving averages can also assist you detect when a trend is going to finish and reverse. You want to spot and ride the trend for as long as possible as a trend trader.
You must understand when to enter and when to exit. A trend is merely the general direction of pricing in the short, immediate, or long term. Some fads are fleeting, whilst others might persist for days, weeks, or even months.
However, you never know how long a certain trend will persist.
A technical instrument known as a moving average crossover can assist you in determining when to enter and exit a trade. When two different moving average lines cross over one another, this is referred to as a moving average crossover.
The crossover strategy may not capture exact tops and bottoms since moving averages are a lagging signal. However, it might assist you in identifying the bulk of a trend.
A moving average crossover system helps to answer these three questions:
1. Which direction might the price be trending (if at all)?
2. Where might be a potential entry point for a trend trade?
3. When might a trend be ending or reversing?
Simply plot a pair of moving averages on your chart and wait for a crossover.
If the moving averages cross, it may indicate that the trend is about to change, allowing you the opportunity to acquire a better entry. You can win more pips if you submit a better entry!
Let’s take another look at that daily chart of USD/JPY to help explain moving average crossover trading.
The pair was in a nice rise from roughly April to July. It peaked at roughly 124.00 before gradually declining. The 10 SMA crossed below the 20 SMA in the middle of July.
What happened after that?
A good downward trend!
You could have profited about a thousand pips if you had shorted at the crossover of the moving averages!
Of course, not every trade will result in a thousand-pip, hundred-pip, or even ten-pip profit.
It could be a loser, which means you’ll have to think about things like where to put your stop loss and when to take profits. You can’t just dive in without a plan!
Some traders will close out their position whenever a new crossover has occurred or the price has gone against the position by a predetermined number of pips.
Huck performs this in her HLHB system. She either exits when a fresh crossover occurs or has a 150-pip stop loss just in case.
The reason for this is that you never know when the next crossing will occur. If you wait too long, you may injure yourself!
One thing to keep in mind with crossover systems is that, while they function great in a volatile and/or trending market, they don’t work so well when prices are range.
You will be bombarded with crossover signals, and you may be stopped out several times before catching another trend.
In conclusion, moving average crossovers can help you determine when a trend is likely to begin or end.
The crossover system provides distinct triggers for possible entry and exit places.
These triggers should be supported by a chart pattern or breakthroughs of support and resistance.