We have already mentioned how you can determine the trend by drawing moving averages on your charts.
On the other hand, it is interesting to know that by using moving averages, you can also determine when the trend is over and it is possible to reverse the trend.
A trend trader should recognize the trend and try as much as possible to ride it.
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In other words, you need to know when to enter the market and when to exit.
Trends can be defined as: general direction of price in the short, medium or long term.
Some trends are short-lived, while others take days, weeks, or even months.
But you certainly do not know how long a certain process will last.
There is a technical method known as “moving average intersection” that can help you determine arrival and departure times.
A moving average intersection occurs when two different moving average lines intersect and cross each other.
Because moving averages are delayed indicators, you may not be able to get accurate price floors and ceilings using the crossover or intersection technique. But crossovers can help you identify the overall trend (the trunk of the trend).
What are the advantages of using moving average intersections?
The Moving Average Intersection System helps you answer the following three questions:
- Which side of the price trend (if any) might it be?
- Where might a trading point be an underlying trend?
- When might a process be completed or reversed?
To use this method, all you have to do is place a few moving averages on your chart and wait for a crossover or intersection to form.
If moving averages cross each other, it could indicate that the trend will return soon , thus giving you a better chance of entry. With a better entry, you will have the opportunity to hunt more pip!
Let’s take a look at the daily USD / JPY chart so that we can better explain how to trade with the intersection of averages.
How to use the intersection of moving averages to enter a trade
From around April to July, the pair had a good uptrend. It has hovered around the price of 124.00 and then slowly moved down. In mid-July, we see that 10 SMAs have crossed below 20 SMAs and cut it.
And then what happened?
A great downward trend!
If you traded at the moving average intersection, you would make a profit of almost a thousand pips!
Of course, “all” trades with a profit of a thousand pips, a hundred pips or even 10 pips will not be.
Two types of loss limits in this method
The trade may be losing, which means you need to know where to consider your loss or profit margin. You can not jump in the middle without a plan!
What some traders do is close their position as soon as a crossover or new intersection is formed or the price moves a certain amount against the position.
This is what Hawk does in his tracking system. He either closes his position when creating a new crossover or has a loss of 150 pips under any circumstances.
This is because you do not know when the next crossover will be. If you wait too long you can seriously injure yourself!
The point to consider when using a crossover system is that although they respond well in a turbulent (trendy) environment, they do not perform very well where the price is suffering.
You will encounter dozens of crossover signals and may be stopped several times before you can catch a trend again.
In short, the intersection of moving averages is very useful in determining the time of formation or completion of the process.
The crossover system, in fact, is potentially the trigger for activating entry and exit points.
These activators or triggers must be confirmed by the graph pattern or failure of support and resistance (which we will address in later lessons).
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