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Home | Day Trading Articles | Forex Trading Strategies
 

Trading strategies for beginners: Crossover systems.

One of the most basic Forex trading strategies that technical analysts have been using for years is the simple crossover system. The crossover system has been mentioned for decades in not only the currency markets, but the stock markets as well. The basic premise of them moving average crossover system is that the trader will have at least two moving averages plotted on a chart. One will be the "fast moving average", while the other one will be considered be "slow moving average". The fast moving average represents the short term momentum. The slow moving average represents the overall long-term trend of the currency pair you are following. The idea is that one the fast moving average crosses over (hence the name of the system) the slow moving average, it shows that short term momentum is either going upwards or downwards, depending on the direction it crosses over the longer-term moving average. As an example, let's say that you are using the 50 day moving average for the fast the average, while using the 100 day moving average to track the slow moving average. When you check your charts, you notice that the 50 day moving average has cross over the 100 and moving average and headed below. This shows the short term momentum is to the downside, and as such is time to short the currency pair as it is heading downwards from its long-term trend. As you follow this chart, eventually the 50 day moving average crossover the 100 day moving average to the upside. When you see that, that is your exit signal as it shows that the short term momentum is now to the upside, making you not want to be short of the currency pair anymore. Some traders will trade this system by always having a position in the market. So using the above example they would have shorted the pair on the first crossover and instead of closing out of the position when the crossover to the upside occurred, they will simply went long at that point. It should be noted however, that these crossover systems are trend following systems and tend to perform poorly in range bound markets. This is why it is very important to be able to recognize if you are in a trend, or simply in a range. The angle of the moving averages can give you a hint as to which of the two it is. If the moving averages are both angle then upward fashion, you are in an uptrend. Conversely if they are both angled in a downward fashion, you will find that you are in a downtrend. The moving average crossover system is one of the first trading systems most traders getting exposed to. It does work over time, but you have to be able to recognize when to use it, and when not to.