Understanding Moving Averages (Part 5)

04/04/2008 12:00 am EST

Focus:

When trading moving average crosses follow these rules: when your shorter moving average period crosses the line representing your longer period from the bottom, look for an opportunity to buy. In other words, the market in this situation is most likely poised for a trend upwards. When your shorter moving average period crosses the line representing your longer period from the top, look for an opportunity to sell. The market in this situation is most likely poised for a trend downwards. Take a look at the following chart; notice that the angle of the cross and the separation of the cross are the keys to large changes in direction.


Don't jump the gun!

Often inexperienced traders assume that a moving average cross is a perfect entry at the exact point of lines intersecting. This is usually not the case. Do not be fooled by what may become nothing more than a sideways market. Again, look for sharp angles and an obvious degree of separation between the two lines.

Looking back at the image above, notice that the solid trends all have two things in common; the shorter period line has a sharp angle up or down, and the two lines are separated by what would be at least two or three numbers on a clock. Once this separation is obvious and a few candles have opened higher than the previous (lower than the previous in the case of a downwards trend) the market has shown its true colors. At this point, you should be looking to pull the trigger.

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