So you want to trade moving average crossovers, huh? Take a currency pair – if the 12 period moving average (exponential or simple, usually exponential) crosses above the 26 period MA we would take this as a signal to go long on the pair. Things are looking bullish…

This is (largely) the principle behind moving average convergence/divergence, MACD

Here’s an example – GBP/USD 1-hour chart from a week or so back, with (roughly speaking) a double-top pattern formed, the shorter period MA, in red, crossing below the purple longer period MA, and the market going bearish. No real problem with this example.

Except, opinion is divided, or even against, using MA crossovers in forex as a general rule. As with all trend-following systems, it’s going to work well enough if the market is subject to a strong trend, but will be less effective when the market is range-bound. Sometimes, there just isn’t going to be a trend, no matter how hard we look for one..In the hypothetical situation of a market that flatlined over the period of the longer moving average, all averages would converge towards the single price level – where’s the signal?

Other MA indicators
The flaw in the logic of trading moving average crossovers also applies to some applications of MACD – Moving Average Convergence/Divergence – and DMI – Directional Movement Indicator. If you really are brave or stupid enough to analyse a range-bound market, get away from moving averages – you might (might) have some success by looking at oscillator indicators – stochastics etc.

It’s also one of the cardinal sins of a forex practice account – you can definitely come away from these with the idea that moving average crossovers can be profitably traded in the short-term.

2 Responses to “Moving Average Crossovers”

1. Shahid Maleek says:

   January 28, 2009 at 1:50 pm

   Short term moving average crossvers are not a trustworthy signal. Better is when the short-term moving average is moving away from the longer term moving average and diverging.

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2. kamil says:

   February 10, 2009 at 7:08 am

   I think as a longer term trend following tool, the MAs can be very useful. Dude I know accumulated over 1 million dollars on a single trade just by following a 21,34,55 EMA. The question you have to ask yourself is, how long do I want to hold the trade for? As far as the crossover goes, I use that as a confirmation tool.

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