Today I would like to expand a bit more on using two moving averages rather than just one. The method is called the particular moving average crossover and it’s probably on the list of first if not the 1st indicator that was used to make a trading system decades earlier. In the event you look at publications going back 50 years, especially those that focused on commodities you will notice the dual moving average crossover doing his thing.
Many indicators that you commonly see for stocks today were originally invented for commodities and futures. Ahead of the 80′s the stock market was relatively quiet and wouldn't exhibit too much volatility, there are no short term traders to make the volatility we see with today’s market. Commodity markets were always substantially more volatile in past times then stocks. Therefore, indicators were necessary to help trade volatile financial market segments. In this day stocks have become as volatile as commodity and futures contracts, so these indicators were applied to the stock market. As a matter of fact all indicators which are once used for commodities and futures at the moment are used for stock market analysis.
The Moving Average Crossover employs two simple moving average period frames. The first time frame is ninety days and the second time frame is 2 weeks. I find that using a combination of these two time frames produces an excellent mix between the short term time frame and however long it takes time frame. The other reason why I use the 90 day period is because it consistently produces the best results away from all moving average time casings tested.
The dual moving average crossover really needs to be used under the right conditions to function properly. This is where the biggest problem arises; most traders tend not to use the dual moving average crossover in the correct market environment. I have observed numerous times when traders employ moving average indicators when market segments are flat and trendless and I've seen many traders use these kinds of indicators when markets are retracing. This is simply not what these indicators were designed for; and if you begin using them under the wrong market conditions you won't ever realize the true benefit of such wonderful trading tools.
The best time and the only real time I use the moving average crossover is after a particular stock or other industry has bottomed out and reversed direction or has topped out and is already beginning an extra shot down. Let me show you some basic examples to get an idea of what sort of market environment I’m talking about.
Here is another example of a stock that is clearly changing direction. Most reversals can take between 1 to 4 months. The longer the consolidation period prior to the reversal of trend the better the odds the trend will go the right path.
Often you will see the same pattern develop in a market. In this particular case, several gold stocks and your commodity are going through a similar pattern these days. Take a look at a few different gold stocks or the actual commodity and you will probably see the same type of trading pattern over the board.
After you find a stock or market that has reversed direction you must await a confirmation signal prior to sell entry. You have to wait to the market to trade completely outside the 14 day simple moving average. If you are going to consider long trades, the market should trade completely above the age 14 day simple moving average. You would enter a MOC (market on close) order a few minutes before the closing bell assuming the market has not touched the 14 day simple moving average that day. If your market comes back down and trades from the average, the trade is nullified and also you must wait for another day how the market trades completely above the particular 14 day simple moving average.
Here is another example for the short side. You have to be very patient and disciplined any time trading crossovers. Notice that we're able to have entered earlier, but we wait till the particular 14 day moving average is below the 90 day moving average and the stock trades completely below the particular 14 day moving average at the same time.
Here is another example for the short side. You have to be very patient and disciplined any time trading crossovers. Notice that we're able to have entered earlier, but we wait till the particular 14 day moving average is below the 90 day moving average and the stock trades completely below the particular 14 day moving average at the same time.
The Moving Average Crossover is just about the best technical analysis tools any time used correctly. Always remember to hold back for market reversals before making use of this indicator. Also remember to improve the setting on the slow moving average to 90 bars and about the fast moving average to age 14 bars.
Next time I will disclose how to use the transferring average crossover to exit markets and the way to place your stop loss with strategic levels.