This blog post is dedicated to arguably the most famous technical analysis signal – the all-powerful moving average cross.
The market alert we are looking at today is triggered when the instrument’s Moving Average lines cross over each other. You can specify the size of the windows, as well as the MA calculation methods. Just like with our MA break alert, you have two options: Simple Moving Average (SMA) and Exponential Moving Average (EMA).
This alert allows you to use one of the most famous technical analysis strategies ever – the Golden Cross. It involves plotting the instrument’s 200-day MA versus its 50-day MA and looking for the times they cross. Historically, when the 50-day MA crosses over the 200-day MA, this is an indication of a continuing uptrend and is a good opportunity to go long (buy). Then, when the trend reverses and the 50-day MA crosses under the 200-day MA, this is again an indication of a downtrend, so it makes sense to close your long position or go short (sell). This very simple rule is arguably the most famous technical indicator.
As you should probably know, there is no such thing as a free lunch, which we can see by trying out the Golden Cross on EURUSD Daily data for the last 5 years. While it did catch the big fall in 2014-2015, it generated a bunch of bad signals, which would have practically erased all gains.
One of the issues with this strategy is that SMA is pretty slow to react to trend changes – it lags behind quite considerably. One way to deal with this is to use a different method of calculating the moving average, such as the exponential moving average. EMA gives more weight to the latest prices, so it is quicker to react, which is especially noticeable with the slow MA.
Here’s the same graph with EMA:
By using a moving average that is quicker to adapt to the price action, it would have generated a return of 12.7% over the last 5 years on EURUSD. Now, all of these profits would come from the first and last trades, which benefited from strong trends that are visible on the graph. In short, this is a viable strategy if you are in a trending market.
Another way to make the moving average more responsive is to shorten the window sizes. But, as we learn from the previous blog post on the MA Break alert, this leads to more noise getting through to our signal, which can result in a lot more false positives. For example, if we halve the window sizes to 100 and 25, we get much more trade signals:
There are a lot more trade signals – 21 of them – and as you probably tell from the graph, most are garbage. It would have still caught the massive drop, but the gain would be erased by a lot of false-positive trades.
But of course, you are not limited by the Golden Cross, you can experiment with a wide range of window sizes, because different instruments may behave very differently, and market conditions change all the time.
For a detailed tutorial on setting up and using the market alerts, as well as picking the right parameters, check out our tutorial.