We already know that on certain diagram areas MA with a larger period works better, while on others it is better to use more sensitive moving average. And why not use them together on the same price diagram?! Application of combinations of moving averages has a number of advantages. Use of only one period often results in appearance of false signals. Therefore many traders employ two or three moving averages with different periods in order make the analysis more clear and reliable.
For example, let us take MA with period 8 and 21 (numbers out of Fibonacci sequence). Intersection of two moving averages with different periods generates a signal for entering the market.
When the MA with a smaller period crosses over the MA with a larger period upwards, the signal for purchase is generated. When the MA with a smaller period intersects the MA with a larger period downwards, the signal for sell is generated. The signal has the following advantage: moving averages show entering market points simply and clearly and perform all preliminary work for the information processing. For a trader it is left only to press the appropriate key of the computer keyboard.However, do not act in haste! A shrewd reader has surely noticed some false signals on the diagram above. Haw can we avoid unfortunate enters into the market? For this purpose, the following filters are adopted.
1. Price filter. After MA crossover one should wait for the candle closing price, during formation of which the signal has been acquired. When the signal for purchase is generated, the closing price after the signal should be above the moving averages, while when the signal for sell appears, the closing price should be below the moving averages. This helps filter out the noises and acquire a stable signal for entering the market.
2. Time filter. Its nature is very simple: one should wait for some time after crossover and only then open a position. As a result, entering the market at favorable signals is ensured. The week point of the filter is that we have to wait for some time, and while we are waiting, the price often moves away quite far from the initial signal.
Finally, there is a very interesting approach to the problem solution offered by the Japanese method of the crossover signal use.
Golden Cross and Dead Cross
If the short-term moving average intersects the long-term moving average upwards, the Japanese call such a crossover as Golden Cross. Dead Cross is a bear signal which appears when the short-term moving average intersects the long-term moving average downwards. The secret is included in the following point: the long-term moving average, or rather its slope, serves as a trend indicator. (Do you remember this signal?) The short-term moving average generates signals at the intersection. The slope of the long-term moving average should also be directed upwards at the crossover, while at the crossover for purchase the slope of the long-term moving average should be directed downwards. Otherwise the signal is ignored as the situation with the trend itself is not clear. A Japanese wisdom says: “those who buy at the bear trend will turn into a ghost”.
Now let us analyze the sample diagram once more, according to the method considered.
Please, mind that the method cut out the worst signal from the example. The points where two moving averages had different slopes are marked with the exclamation sign. As further the long-term MA began confirming the signal, in particular, its slope, the possibility of joining the movement may be considered. We would like to add that one should not be afraid of missing a profitable signal. There is one more secret of stock trade. First of all, you should try to achieve minimization of your loss and pay most attention to this point. A profit will not be bad in any case.
At the next lesson we will deal with different kinds of moving averages, and now, please, carry out the following task in order to learn the material better.Download with your software two moving averages with different periods onto the day EUR/USD price diagram and analyze the crossover signal. Note how the confirmation by the slope of the more long-term moving average of the crossover signal affects the bargain profitability. Before you start performing the task, check your knowledge by answering the questions:
How many “MA crossover” signals are there on the diagram?
Choice:
1.
2.
3.
4.
5.
6.
7.
8.
The moving averages do not intersect on this diagram.
How many signals for purchase and signals for sell are there?
Choice:
1. 4 for buy and 4 for sell
2. 3 for buy and 3 for sell
3. 5 for buy and 5 for sell
4. 4 for buy and 3 for sell
5. 3 for buy and 4 for sell
6. 4 for buy and 5 for sell
7. 5 for buy and 4 for sell
How many signals not complying with the rule of Golden Cross and Dead Cross are there?
Choice:
1.
2.
3.
4.
5.
All signals are good.
Now check yourself:Question 1
Correct answer: there are totally seven signals “MA crossover”
Question 2
Correct answer: there are three signals for buy and four signals for sell
Question 3
There are three signals not confirmed by the slope of the long-term MA.
Have a nice day! Alex Sabodin.
www.alpari-us.com
The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, opinions and official policy or position of Alpari (US), LLC.
