Mastering Moving Average Crossover Secrets Can Be Highly Profitable

As a trader, you need to master the two technical indicators that are very simple to use but most effective. These are the trendlines and the moving averages. These two technical indicators can be used with a naked eye by just eyeballing the chart. They work for all markets. While calculating the moving averages, the time period used to calculate the average is very important. The shorter the time period, more fluctuations and whipsaw. What this means is the chances of getting wrong trading signals increase with shorted time periods.
There are three types of moving averages. In case of weighted and exponential moving averages, more weight is given to the recent prices as compared to the old ones making them more responsive to recent price action as compared to the simple moving averages. Simple averages are calculated by dividing all the prices with the number of time periods used to calculate the average.
Now, longer time period averages tend to move slowly and have a long curve that makes them slow in giving trading signals. Traders use a combination of slow and fast averages in trading. A trading signal is generated when the two cross each other and hence the name crossovers.
Most traders use the combination of three averages. When the short period average crosses the medium one, this gives a trading signal but this need to be confirmed. Confirmation is obtained when the short and the medium move above the longer period average. Futures traders use the combination like 4,9 and 18 period averages. Stock traders use longer periods like the 40 day, 100 day and 200 day to generate trading signals.
Now next to trendlines, moving averages are the most widely used technical indicators. So when using moving average crossovers, when the short period average is above the long period average, you should be long. Similarly when the short period average is below the long period average, you should be short.
Moving Average Convergence Divergence (MACD) is based on these averages and is a powerful technical indicator in the trading arsenal of any trader. These crossovers between the three averages are an indication the momentum is shifting from one direction to another.
One important caveat about these averages that you need to always keep in mind is that moving averages are lagging indicators and do not work well in choppy or non trending markets. However, in trend markets, they work very well. You need to master them if you want a winning edge in trading!