The Moving Average Crossover System

Filed under: Learn Forex Trading |

Screen shot 2013-02-19 at 09.44.33Probably one of the most, if not the most, famous trading system in both the forex and equities markets is the moving average crossover system. If you do any research at all into trading systems, then this is probably the one that is likely to stand out. So what is it – and more importantly, is it a successful way to trade?

 

The principles behind a moving average trading system are in fact very simple. You take two moving averages – a fast one and a slow one. A common one might be an 8-day exponential moving average and a 21-day exponential moving average. When the fast moving average crosses above the slow moving average, you go long; and when the fast moving average crosses below the slow moving average, you go short. That is it – simple and easy to follow. You exit when the moving averages cross over again in the opposite direction.

 

On the whole, there is a great deal of proof that moving average crossover systems do work. If you are able to create a workable EA (expert advisor) for Metatrader and run it on the strategy tester, you should find that such a system does indeed have a market edge across most – if not all markets in the very long term. However, a moving average crossover system does have it problems.

 

One problem is that in volatile markets, moving averages can often chop around and cross over multiple times, causing you to go in and out of trades. Another problem is that you cannot set stop losses and targets, as the crossovers determine these. This means that you cannot control your money management, and you could run in to problems with blowing up your bank if you are not careful. Finally, these are very long term trading systems, and most people simply do not have the patience.

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