Moving Average Crossover Strategy: Scam or Effective Tool?
The moving average crossover strategy is often debated in the world of technical analysis. Some believe it to be one of the most powerful tools, while others dismiss it as a scam. But does this strategy really work? Let’s delve into all aspects of the moving average crossover and reveal a tool that can make your life easier, especially if you trade on the Brazilian Stock Exchange.
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The Truth About Moving Average Crossovers
Let’s get straight to the point: moving average crossovers can indeed be an interesting strategy. However, it’s crucial to understand some nuances to use it effectively. Martin Pring, in his book “The Bible of Technical Analysis,” asserts that the true buy or sell signal occurs when the **price** crosses the moving average, not when one moving average crosses another. Therefore, price is always the most decisive factor.
That said, strategies involving moving averages still have value. A classic combination is using a 9-period moving average alongside a 21-period moving average. This setup is common on longer timeframes, such as the daily chart. However, on very short-term charts, like 1-minute intervals, especially in low-liquidity assets, moving average crossovers can generate many false signals due to market noise.
Practical Application: Example on the Bitcoin Chart
Let’s analyze the daily Bitcoin chart. A useful tool on TradingView is the “MA Cross,” which automatically marks the points where the moving averages cross. This makes it easier to identify signals, but it’s essential to understand that in many cases, the price provides better and more anticipatory signals than the moving averages themselves.
A crucial point is to avoid choosing moving averages that are too close, like 9 and 12, as this generates inaccurate signals. The idea is to observe the price behavior relative to the moving averages and adjust the periods as needed. A fine-tuning can be done manually by observing the chart’s history.
In the Bitcoin example, the 9-period moving average crossing below the 21-period moving average occurred after the price had already given a stronger sell signal, such as breaking a previous low. However, in some situations, the moving average crossover can save the trader who missed the initial signal, allowing them to enter the trend a bit later, but still profitably.
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When Does the Moving Average Crossover Work Best?
Moving average crossovers tend to work better on daily charts of highly liquid assets, like Bitcoin. In volatile markets, such as cryptocurrencies, using moving averages can help identify trends and capture significant moves. For instance, in an uptrend, the faster moving average (9 periods) crossing above the slower moving average (21 periods) can signal a good buying opportunity.
However, the problem is that often the crossover occurs after the price has already moved significantly, reducing profit potential. For this reason, many traders combine moving average crossovers with other indicators or techniques, such as Price Action, to get more accurate signals.
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Example on the Mini Index: Moving Average Crossover vs. Price Action
Now let’s apply the strategy to the 5-minute chart of the Mini Index. Here, the moving average crossover gave a clear signal at the start of an uptrend. Although Price Action also provided several entry opportunities, the moving average crossover allowed for an earlier entry, capturing a 1000-point move.
This shows that in some situations, the moving average crossover can be more effective than Price Action, especially for identifying the start of a strong trend. However, it’s crucial to set an appropriate technical stop. In the Mini Index example, the stop should be placed just below the day’s low, avoiding being stopped out by false breakouts.
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Conclusion: Does the Moving Average Crossover Work?
The answer is: it depends. The moving average crossover can work well in directional markets and on longer timeframes, but it tends to fail in sideways markets and short timeframes. Therefore, it’s important to use this strategy wisely, adjusting the moving averages according to the asset and the chart’s timeframe.
And you, have you used the moving average crossover in your trading? Share your experience in the comments! And if you don’t yet have an account with BTG Pactual, the largest investment bank in Latin America, click the link below and open your account. Good luck with your trading!
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