A moving average crossover occurs when a short-term average crosses through a long-term average. Crossovers generate very strong and objective trading signals, which is why they’re so popular. Apart from signifying important shifts in momentum, they also indicate changes in support/resistance levels no matter holding period. They themselves play the role of a support and resistance.
The moving average crossover strategy is geared toward finding the center of a trend. A trend defines price action during which prices move during a specific direction over a period of your time. Generally trends are either upward or downward, as sideways movements are considered consolidation and not trends. Most of the time, approximately 70%, capital markets trade tight consolidative patterns and only trend 30% of the time. With this in mind, it’s import to be ready to define a trend and hop on as soon because it is recognizable.
Short term trends are often captured using short term moving averages. A moving average is that the average of a selected period, and when a replacement datum is added, the primary period of the typical is dropped. A moving average crossover strategy looks for periods when a brief term moving average crosses either above or below a extended term moving average to define a brief term trend.
Longer moving averages are gauged to capture long run trends within a financial market. When the 20-day moving average of gold prices crosses below the 50-day moving average, as seen within the chart of gold, a medium term trend is taken into account in situ .