Moving Average Crossover and Potential Trend Reversal

Moving average cross is a very important phenomenon in Forex trading. The cross over happens only if there is potential trend change or major retracement in the trade. Traders can take precautionary steps as soon as the moving average starts to move towards one another. This is a clear indication that a potential trend reversal is going to take place. A successful crossover followed by new “Higher High or Lower Low” signals the establishment of new trade.

 

Moving average Cross over in weekly time Frame

 

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Figure: Trading with moving average crossover

 

The Green moving average indicates 21 EMA (Exponential Moving average) and the red moving average indicates 8 EMA. Traders can easily find out the retracement level of a wave with the help of moving average. The first point A was confirmed with the crossover of the moving average. Similarly point B, C and D was calculated just by only seeing the crossover. But in the figure, the trade was taken at the point D. So what triggered the trade? Is it the bearish engulfing candlestick pattern? The main reasons behind taking this trade are the crossover of EMA followed by price action confirmation.

Trading the moving average is very profitable and reliable in longer time frame. But trader must wait until there is a valid price action pattern and strong trend momentum. “It is often said the best MA crossover trade miss the 30 % of the move.”

Synthetic Currency Pairs

Different pairs behave differently with different moving average. You can get an excellent result by using 100 and 200 daily MA on the major pairs but the result will not be the same on synthetic currency pairs. These pair’s works best with exponential moving average. The professional trader uses 8 and 21 daily EMA on the synthetic pair. The time frame is also very important while trading with MA. Make sure you use higher time frame to get a better result.

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