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How To Use A Moving Average Crossover To Buy Stocks (Swing Trading Strategy for Beginners) - YouTube
Channel: The Secret Mindset
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Here is what most of market gurus are teaching
you about moving averages.
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You take a short-term moving average and a
long-term moving average and you buy and sell
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when you see crossovers.
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Nice, so you buy here, the price rallies,
you exit here with 100% profit, you sell here,
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another winning trade, one more buy, another
win...this is too easy, like printing money.
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What they donât tell you is that these results
happen maybe 10%-15% of trading days, if youâre
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lucky.
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Here is how the normal trading day looks like.
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Not so profitable anymore, right, with all
the choppiness and false signals?
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If you follow a crossover pattern, in 2 weeks
your account is gone, guaranteed.
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If i learned something in my over 10 yearsâ
experience of trading is that moving average
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crossovers donât work like advertised.
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So in the following minutes, weâll talk
about moving averages, how you should use
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them correctly and Iâll show you how i use
the crossovers in my trading plan.
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Before we continue, if youâre new to our
channel, make sure you subscribe, click the
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notifications bell and leave a like to show
your support.
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Now, why are moving average crossovers so
popular?
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Because, a moving average is a trend indicator,
and you were told that the trend is your friend,
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so why not using 2 or 3 moving averages, to
increase your chances.
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Here is a hard truth and, please keep in mind
that this is simply my discovery after 10
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years of trading.
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Moving averages crossovers donât work on
lower time frames.
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Period.
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Iâve tested hundreds, thousands of combinations.
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Some of them were decent, some of them damaged
my account.
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Youâll have a hard time trading crossovers
on the 5-minute or 15-minutes charts.
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If you found a magic crossover that works
on lower timeframes, go ahead and share it
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with me, because i simply wasnât able to
record consistent profit by trading crossovers
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on lower time frames.
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On higher time frames, well, we have another
story here, and you might be able to profit
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from crossovers.
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But first, let me explain why is dangerous
for you to trade crossovers on lower time
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frames and why this strategy will most likely
lead to frustrations and bad results.
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The biggest drawbacks of moving averages is
the fact they lag price.
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Price moves first and the moving average moves
second.
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You are always behind the price.
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The moving average is a trend following indicator.
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It can only tell you when the trend has already
happened.
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You canât forecast a new trend with a moving
average because itâs a lagging indicator.
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Pay attention in this chart that the moving
average was still rising whilst price hit
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the resistance level and went down by a considerable
amount.
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The second problem with moving averages is
the noise.
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One of the best things about using moving
averages for trading is that they are designed
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to smooth out the erratic price data so that
you can be able to detect and stay with the
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trend.
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However, even the best moving averages suffer
from noise.
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On lower time frames, you will witness many
false signals if the market is consolidating
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or the price spikes up and down due to higher
volatility.
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Another drawback of a moving average crossover
system is the sideways markets.
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Nothing is more frustrating than trying to
use a crossover strategy in a sideways market!
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Your stop losses wonât stand a chance!
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Regardless of what type of moving average
you use in a sideways market, they will not
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work effectively.
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So, if you are a day trader, I would say is
better to avoid crossover strategies on lower
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time frames.
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There are better ways to use a moving average.
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Moving averages are great to determine the
trend direction of your instrument.
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While price action and structure should be
your main focus, you can get a general idea
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of the market direction with a moving average.
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So, here is how you could take advantage of
a moving average:
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First, to identify and confirm market trend
While keeping in mind that are lagging indicators,
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you can use the slope of the moving average:
up sloping is an uptrend and down sloping
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is downtrend.
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You can also use price location: if price
above moving average, look for long trades.
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Below the average you would look for short
opportunities.
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A stock is considered to be in an uptrend
when the price is above a moving average and
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the maâs slope is upward
A stock is considered to be in a downtrend
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when the price is below a moving average and
the maâs slope is downward
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The second way you could use a moving average
is as support and resistance level.
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Moving averages offer traders dynamic areas
of support and resistance because are changing
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depending on recent price action.
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Being so common and followed by so many traders,
you can often see on charts that the popular
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moving averages work excellent as support
and resistance levels.
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A simple ma could be considered as a dynamic
area of support or resistance
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The area between two moving averages could
also be considered as a dynamic area of support
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or resistance.
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A longer-term moving average like ma 200 has
a greater relevance to the price, and offers
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less false signals, compared to shorter-term
moving averages.
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Now, letâs come back to the crossovers.
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So a moving average crossover system will
catch good movements when markets are trending.
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However, when markets are trading in a range,
this system is subject to many losing trades.
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And on lower timeframes, the odds are not
in your favor.
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So, are moving average crossovers useless?
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Well, not quite.
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On higher timeframes, for traders and investors
that hold positions for several months using
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higher time frames like daily, weekly, or
even monthly charts, the moving averages have
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higher chances of indicating a valid signal.
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But thereâs another problem here.
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A two-moving average crossover system is usually
a âstop and-reverseâ strategy, meaning
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that you will be in the market at all times
when used as a mechanical strategy.
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Once an entry is triggered, you will remain
in the market until the opposite signal is
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generated, at which time your current position
will be liquidated and a new one entered in
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the direction of the new signal.
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But even on higher time frames, this strategy
is risky.
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So, i would only take long positions and completely
ignore short signals.
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And hereâs another important tip which will
cut your losses even more.
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When a buy signal is generated, you must wait
for the bar to be completely finished before
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entering the trade.
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I canât remember how many times I traded
a crossover signal without waiting for the
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candle to be closed.
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So, wait for the candle to close and confirm
the crossover, it will save you a lot of bad
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entries.
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Once you have triggered your entry, there
are several ways to manage this trade.
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Traditionally, you would remain in the trade
until an opposite signal appears.
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While waiting for an opposite signal to exit
your position may be the ânormalâ approach,
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you may find this method to be inconsistent,
depending on the marketâs behavior.
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This approach will often lead to extremely
late exits, which can severely cut into your
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profits.
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Instead, you could try other tactics like
using a traditional trailing stop, using a
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single moving average crossover exit, using
a fixed profit target, using Fibonacci extensions
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as targets or using visual support and resistance
levels as targets.
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I personally use the 200 EMA and the 20 EMA
on the daily chart to search for buy entries
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on stocks with good fundamentals, but these
2 moving averages are not set in stone.
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Depending on the stock traded, you can have
other values for your crossover signals in
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a daily timeframe.
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As you may know, the market will change over
time.
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At times, a market may be quiet and trending,
while other times it may be erratic and directionless,
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so you should adjust the moving averages of
your crossover system to find the best fit.
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So, no shortcuts here, there is no universal
moving average crossover that works on any
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market.
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You must continually back test and adjust
your moving averages by yourself.
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With todayâs trading platforms, you can
even scan the entire market of stocks with
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specific criteria to find those that are behaving
in a similar manner.
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You only need a good stock screener, and trade
stocks with good fundamentals.
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To increase your chances when trading a crossover
strategy, itâs good to have fundamentals
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on your side, this is why i only trade companies
what have good perspectives.
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With a stock screener, you still have to do
your homework, but you can set screens to
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create your watch list based on your crossover
conditions and itâs going to save you a
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lot of time, especially if youâre monitoring
hundreds or thousands of stocks.
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So, donât neglect the power of a stock screener,
it can help you a lot in your trading.
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Now, if you found value and learned something
new, make sure you subscribe to our channel,
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turn on the notifications so you donât miss
future uploads and leave us a like to show
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your support.
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Until next time.
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