At this point, you should be looking to pull the trigger. Using two moving averages — one of shorter length and one of longer length — to generate trading signals is commonly used among traders today. Trending markets are characterized by steady upward price movement in bull markets and steady downward price movement in bear markets. There are many different ways in which this double crossover method may be used. The combination possibilities are endless. The two moving averages can be daily or weekly, but one must always be of a shorter time frame than the other.
Or a and day, or a day and day average. The shorter moving average measures the short-term trend, while the longer MA measures the longer-term trend. Buying and selling signals are given whenever the two cross over or under one another. Trading rules for the double crossover method are quite simple: whenever the shorter-term moving average crosses above the longer-term moving average — and the longer-term MA happens to be rising — a buy signal is generated. Conversely, whenever the shorter-term average falls beneath the longer-term average — and the longer-term average happens to be falling — a sell signal is generated.
The daily and weekly bar charts on the BigCharts. Included in this chapter are a number of BigCharts. Bear in mind that the same rules that apply for interpreting the day and day moving average combo apply for all types of double series moving averages; and can be used for all time frames, including daily, weekly and monthly charts. Here is a fine example of how the double crossover system of moving averages works in J. Here, the daily chart provides a buy signal when the shorter day moving average crosses over the longer day moving average.
Conversely, a sell signal is flashed when the longer of the two averages day crosses over and remains on top of the shorter average day. This basic rule of thumb applies for moving averages of any size and not just the day and day functions. Notice in March that the first buy signal was given as the day average light colored line crossed on top of the darker day line. So long as the price bars were rising and remained on top of the averages, the buy signal remained intact. This was the case from March through June , at which point the priceline dropped underneath the averages and the averages started turning down, indicating a loss of momentum.
In August the day average crossed on top of the day average, flashing a sell signal. This continued until November, when another buy signal occurred. However, since the two moving averages got so far out of synch with one another, it warned the trader to avoid making a commitment to the stock until the averages got back in line. Because the two averages became widely spaced apart shortly after this signal, it indicated that an over-bought condition was developing in J.
Therefore, the prudent trader would have been right to look for exit signals. The first such signal came in October, at which time the day average turned down and failed to support the priceline.
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Even though a crossover did not occur until one month later, it would have been wise to sell out when the first day moving average turned down. The rules for interpreting single line moving averages still apply when interpreting double line moving averages, even when the two lines have not crossed over yet.
Shortly thereafter, a bearish crossover occurred, though it would have been wise to exit long positions as soon as the moving averages — particularly the day average — starting curving over, reflecting waning momentum.
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Another strong buy signal was given in November , when the day average crossed the day average. It soon starting curving over, however, and the priceline began a prolonged sideways movement into the year The next formal sell signal was flashed in September, at which time the day average crossed over the day average.
The sell signal remained in place through the remainder of the year. General Motors provides a clear sell signal in its daily chart In May note crossover and downward curve of moving averages and their relation to the priceline. A buy signal was given in October note bowl-shaped bottoming pattern of moving averages, the rising priceline in relation to the rising averages and the crossover of the shorter average day on top of the longer average day.
The next sign of trouble came in May , when the two averages got out of line with both curving over. The priceline plunged through both of them before bouncing higher. Remember, when trading using two moving averages, you do not necessarily have to await a crossover before making a trading commitment — a simple curve of one or both of the moving averages, or a failure of the moving averages to contain the priceline is all the signal that is required.
The crossover serves more or less as a confirmation to the preliminary buy or sell signal. A strong buy signal was given in April , when both moving averages were close together and moved up at the same time while the price bar were also rising. A separation of the two averages occurred between May and June of that year, followed by a curving over of the shorter day moving average in June. This provided a preliminary sell signal to the alert trader.
An all-out sell signal was given in September when the day average fell below the falling day average. This was followed by falling prices and then a short-term buy signal in December Instead, the day moving average, after a short rise in December, quickly turned back down and continued to curve lower even as the day average was rising. This is what is known as divergence, and it is typically bearish. In cases like these where one moving average gives a buy signal while the other give a sell signal, it is best to exit long positions and either await a clearer signal before re-establishing trading positions or else sell short if you are an aggressive trader.
The longer of the two averages holds more significance, so in this case the fact that the day average was falling implied that the longer-term trend was still down; therefore, short positions were justified. The sell-off continued throughout the year ; however, notice how the two averages had moved close together and were starting to round off in bowl fashion. This provides a clue that the sell-off likely has halted and that accumulation could be underway.
The trader should watch this chart carefully in anticipation of the next buy signal. A bullish buy signal continued throughout and into the early part of Notice, however, that the moving averages began moving apart in early and continued to spread apart into April, at which time the day moving average started to curve over with the day average soon following suit. The first sell signal was given in April when the priceline for Cisco Systems fell through both averages. The chart provided on the next page for Chinadotcom Corp CHINA is a great example of how a moving average system can serve to protect traders from adverse moves in the stock market.
The large gap between the priceline and the moving averages that occurred in March just before the crash was a preliminary warning that the stock was due a significant pullback. Whenever it becomes plainly evident that there is a wide separation between the moving average and the priceline, the trader should prepare to either sell or sell short. Notice also how both averages — particularly the day average — began losing momentum and curving over just before the sell-off occurred.
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This was yet another advance warning that a plunge was imminent. After the initial crash, CHINA continued to trade below the two moving averages for the rest of the year, indicating that selling pressure was intense throughout. The chart for Boston Properties BXP served as a wonderful guide for making profits over a two-year period.
Using the double moving average system, a trader, after initially buying in April , knew to sell short between May and June of that year as the gap between the day and the day moving averages widened conspicuously. The sell signal was confirmed in July as the averages crossed over. The trend remained down until December , at which time a preliminary buy signal was flashed as the two averages bottomed and turned up together the crossover occurred the next month.
After a rocky start in the initial months of , a firm buy signal was flashed in March, and from there prices headed higher. A preliminary sell signal was given in September , as both averages lost momentum and curved over.
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Although the next firm buy signal had not been given as of December, it was beginning to look like a distinct possibility. Note how both averages are very close together and appear to be turning up with the priceline moving higher. However, as a clear-cut buy signal has not yet been flashed it is safest to remain on the sidelines awaiting a clear signal. Both averages must turn higher before a long position can be safely established.
Resource Asset Investment Trust RAS is a dynamic stock that can be traded with wonderful results using a double moving average trading system. Note here the interplay between its day and day moving averages. Note especially how the two lines cross through each other at critical turning points along the timeline.
Whenever the day moving averages crosses through and above the rising day average, it always precedes a big run-up in share price. Note also how well the averages tend to act as support and resistance for the priceline.
The first significant buy signal came in May when the day MA crossed through and above the day MA. Both curved over in August, at which point the trader should have sold short. After a prompt sell-off from the October high, the averages curved over and failed to support the falling priceline, at which time the trader should have sold. By December, however, the day moving average appeared to be ready to cross through the day average, which would send another buy s. After delving into the world of moving averages there is no better place to go next than into the world of MACD.
Simple, the MACD is comprised of two moving averages. Some traders argue that there is no better technical indicator than that of the MACD, more often than not, this author tends to agree.
The theory behind MACD is really the same theory behind trading any other form of a moving average cross. Generally a technical analyst can learn more from the interaction of two moving averages than he or she can learn from a single moving average in and of itself. When prices in the market begin to rise or trend upwards the 12 EMA will of course increase faster than will the 26 day.
Visually this results in a MACD that is slanted upwards. Conversely when prices fall or trend downwards the opposite will occur and the 12 day EMA will decrease faster than will the 26 day, creating an obvious visual slant downwards. The MACD does oscillate at what would be considered a zero line. In other words, the MACD is either above or below the level that can be considered the third part of the equation.
Some analysts refer to this line as the signal line, or the trigger line. Essentially this line is usually a 9 day exponential moving average of the actual MACD itself.