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Welcome to our ‘Trading Strategy’ series, where you will get introduced to different strategies to help you trade better. In this article, we’ll introduce you to a basic forex trading strategy the moving average crossover.

What is the moving average crossover trading strategy?

The moving average crossover relies on a simple moving average, or SMA for short. The SMA is a lagging indicator that uses past prices and moves at a slower pace than the current market price. The SMA can have numerous time periods, such as 20 days, 50 days, 100 days or 200 days. It is calculated by adding the closing price of a forex pair over a specific period and then dividing this total by the number of periods.[1]

But don’t worry – you’ll never have to calculate anything. The SMA can be obtained automatically by using any forex charting software.

In general, the longer the period over which the SMA is averaged, the slower it moves. For example, the 200-day SMA moves much slower than the 50-day SMA.

A moving average crossover occurs when one SMA crosses another. For example, if the 50-day SMA crosses the 200-day SMA, this suggests that the market is moving higher because recent prices are moving faster than the longer-term average.

In other words, when the shorter SMA moves above the longer SMA, it means newer prices are higher than older ones. This essentially gives you a signal to buy that currency pair.

On the other hand, when the shorter SMA moves below the longer SMA, a bearish trend is emerging. So, when the 50-day moving average falls below the 200-day moving average, that’s your cue to sell the currency pair.

Of course, the moving average isn’t the only thing traders use to confirm their buy or sell signal. Rather, it is often used in tandem with other strategies to help you confirm the direction of the trend.

It’s important to note that the SMA isn’t the only moving average to choose from. The exponential moving average (EMA) uses a different methodology for tracking shorter versus longer term price movements but conveys basically the same information.

The moving average crossover is a good tool to begin visualizing the forex market. By simply looking at two lines, you can see if short-term price action is stronger or weaker than the more established trend. This opens up a world of trade possibilities.

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[1] Investopedia. Simple Moving Average.

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