Everyone’s first strategy: Simple Moving Average Cross
Probably this strategy is the first strategy for most traders – either discretionary traders or developers that begin writing their own systems. It is the first strategy found in books. It is based on a very simple idea.
The system uses two moving averages: one slower and one faster (based on less bars than the slower one) – and therefore more responsive to price moves.
The idea is that the direction of the fast moving average is the direction that should be traded, but however, the confirmation comes with the cross of the slow moving average.
There isn’t really much to say about it. It’s the basic trading strategy. Doesn’t have any other filters, therefore whipsaws (false signals) cannot be averted in any way. Whipsaws happen when the fast moving average keeps crossing with the slow one, generating lost trades.
This strategy is best used on daily charts, with really long periods for the slow moving average, most notably being known the 200 days average. It is so important, that reaching the 200 days value on a well known stock or fx rate appears in the news, as many traders are eyeing this level, which could be used therefore to take profit from important price moves that could happen over several days.
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