Trading Moving Average Crossover Strategy

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Video Transcription:

Hello, traders. Welcome to Day Trading Binary Options. In this lesson, you
will learn how to use moving-average crossovers to trade fast-paced
environments and scout the markets, as well as day trade end-of-day
expiration options. But first of all, let’s learn what a moving average is.
Well, moving averages are indicators that smooth price action and filter
out market noise. They are trend-following indicators and define the
current direction with a lag. Like its name implies, these indicators are
the average of price of a financial asset over a specific period of time.

For example, a [inaudible 00:42] moving average calculates the average
price in the last five periods. So on a 15-minute chart, a moving average
calculates each period as 15 minutes, one candle. This means that if you
plot the five-period moving average on a 15-minute chart, this moving
average will calculate the average of the last five periods or of the last
five 15-minute candles to draw the actual moving average on the chart.

There are two kinds of moving averages: a simple moving average and an
exponential moving average. The difference between them is simple, and it’s
that the calculation of the exponential moving average gives more weight to
the more recent prices. So the exponential moving average reacts faster to
price fluctuations. And of course, it’s up to you if you want to use the
simple moving average or the exponential moving average. But for this case,
or for these systems that we’re going to teach you, we are going to use the
exponential moving averages because we want to get as fast as we can in the
markets without actually losing, or without actually missing the move.

The more periods you choose to calculate the moving average, the more it
lags with price action. Here’s an example of the lagging factor. Here’s a
20-period moving average on a one-hour chart. As you can see, the 20-period
moving average goes very close to price and reacts with every time price
fluctuates. For example, you can see that when we were in a down-move, the
moving average was pointing down and was being drawn down. When we hit this
turning point and the price moved above the moving average, the moving
average quickly turned to the upside. Every time price corrected, the
moving average flattened a little bit, until we hit this period of range or
chopping it where the moving average is completely flat.

Unlike the 200-period moving average, that reacts very slowly to price. As
you can see here, this is the same one-hour chart. The only difference is
that we have plotted here the 200-period moving average. You can see that
because it uses the last 200 candles to calculate the actual indicator, it
lags so much more than the 20-period moving average. This is basically the
difference or the lagging factor that we were talking about in the previous
slide.

Well, the 200-period moving average is mostly used to calculate . . . not
to calculate, but to look for heavy areas of resistance and support and to
actually know if the market overall trend has changed. For the system or
the crossover system we will use, much faster moving averages because we
will be scalping or day trading, and we want to actually get in the move at
the bottom of it or at the top of it. If we are using a 200-period moving
average or a 100-period moving average, we will get very few signals, and
we will be late to the actual move. But let me go further and show you what
we actually mean.

Before we go any further, we actually want to show you that moving averages
can also act as support and resistance. A moving average can be used as
support or resistance in the up and downtrends. This is important for you
to learn because when we are using the crossover systems, you will see that
we will be trying to trade with the trend direction. Of course, if we hit a
turning point, we will be countered in trading. But when we are in a very
aggressive trending market, we are going to wait for directions, and then
trade with the direction of the market to make it easy on our trading.

The more periods you choose for your moving average, the more precise the
setups will be. Okay. So here’s an example of a 12-period moving average
acting as support and a 30-period moving average acting as resistance.
Here’s an example of a chart in a very aggressive up-move. As you can see,
we have plotted the 30-period moving average on it, and it acted as support
here once, twice, three times, and four times.

Here’s the same 30-period moving average, but in a very aggressive down-
move. You can see that we corrected to the upside and acted here and found
a resistance here and here. This can also be called resistance because
there are fake-outs. But for this lesson, we will focus on actual rejection
of the 30-period moving averages. This is important because as you can see
here, this is just one moving average, but you will see that when we
actually are learning how to use the crossover, these steep corrections or
deep corrections to the opposite side of the trend will give us nice
signals and nice crossovers to trade with the market direction. Of course,
you already know that trading with the market direction makes things a lot
easier than trying to find tops and bottoms.

But with this moving average crossover, you can actually counter-trend
trade if we hit a heavy [inaudible 07:07] of support or resistance, but
more of that on the following slides. So the moving average crossovers,
there are common ways to actually use this indicator. The idea here is to
use one moving average faster than the other. The faster moving average is
called the trigger. Why it’s called the trigger? Because when it actually
crosses over or crosses below the slower moving average, we get the trigger
to buy either calls or puts on the instrument that we are monitoring or
analyzing. So the length of the moving average in the system defines the
timeframe and expiration options for the system. This is very important.

If we are going to use faster moving averages and we choose to scalp the
market, we are going to analyze price action on the lower timeframes and
choose a lower expiration time. For example, if we use the 15 and 30-period
moving average, we will choose to day trade the hourly to end-of-day
expiration options, and this is an example. If we choose a much slower
moving average crossover system, like the 50 to 200-period moving average
crossover, we’ll be better off trading the weekly expiration options and
analyzing price action on the four-hour charts, because the 50 and 200-
period moving averages are used on a much slower environment.

Remember that the higher you go on the timeframes on your charting
platform, the less market noise you will have, so the less fluctuations and
the less crossovers you will have if you use much lower moving average
crossover systems on the higher timeframes. But these are just examples.
These are not the actual systems that we are going to learn.

In this lesson, we will teach you how to use two different systems. The
first system is the 15 and 30-moving average crossover on the hourly charts
for end-of-day expiration options, and this is basically what we are going
to do with the 15 to 30-minute . . . I’m sorry . . . with the 15 and 30-
period moving average crossovers. We are going to analyze the hourly chart
and choose to trade the end-of-day expiration options. But if you like to
be, if you’re not comfortable holding on a trade for an end-of-day
expiration, we will teach you a 7-11 AM moving average crossover on the
five-minute chart, that you can use to trade the 15-minute to the hourly
expiration options. Okay? Now, let’s go and let’s jump into the faster
moving average crossover system, which is the seven and 11-period moving
average crossovers.

The general rules here are that the system is meant to be used in fast-
paced environments and lower timeframes for short trades. A bullish signal
is when the seven-moving average crosses above the 11-moving average, and a
bearish signal is when the seven-moving average crosses below the 11-moving
average. This is simple. We buy calls when we have a bullish signal, and we
buy puts when we have a bearish signal.

Remember that this system is meant to be used on the five-minute charts and
be traded with the 50-minute to hourly expiration options. Here’s an
example of a bullish signal, using the seven/11-period moving average
crossover. You can see right here that we have actually the black moving
average in the seven-period moving average, and the orange moving average
is the 11-period moving average.

When we have a crossover of these two moving averages, when the seven-
period moving average crosses above the 11-period moving average, we have a
signal to buy calls. Here, this is the five-minute Aussie/US dollar chart.
If you choose to trade a 50-minute expiration option right here after the
crossover, one, two, three, our option would have expired in the money, as
well as the hourly.

Here is an example of a bearish signal to buy puts on the US
dollar/Japanese yen five-minute chart. Even though we are in a steep up-
move, we have a turning point. Okay? When the seven-period moving average
crosses below the 11-period moving average, we have a signal to buy puts
and an hourly expiration option, as well as a 50-minute expiration option
would have expired. Both options would have expired in the money.

Now, the 15 to 30-period moving average crossover system. The general rules
are the same. I mean, with a difference that this system is meant to be
used in a slower environment and higher timeframes for day trades. A
bullish signal is when the 15-period moving average crosses above the 30-
period moving average, and a bearish signal is when the 15-period moving
average crosses below the 30-period moving average.

This system is meant to be used in the one-hour charts and should be traded
with end-of-day expiration options. This is because the moving average will
react slower to price. If you actually trade the 15-30-moving average
crossover system on the slower timeframes, you will get less reliable
setups, meaning that in lower timeframes and faster-paced environments you
might get the actual crossover once the move has already begun.

So when we are trading the lower timeframes and the lower expiration
options, we want to use a faster system to get at the beginning of the
move. If we are day trading, this 15-30-moving average crossover system is
excellent because if you use a faster crossover system on a higher
timeframe, you might get too many false signals. So this system is meant to
be used in the one-hour charts and should be traded with end-of-day
expiration options.

Here’s an example of the Aussie/US dollar one-hour chart. As you can see
here, we are in a steep up-move. We hit a head and shoulders, and when we
break with the neckline, we have actually a crossover right here, but we
wait for confirmation, the breakout of the neckline, of this head and
shoulders. When we break below this trend line or neckline, in this case,
we buy puts on the Aussie/US dollar for end-of-day expiration options. You
can see that we expire or the option expires in the money. Right here is
the actual trigger.

Here’s a cable one-hour chart. As you can see here, even though we are in a
very choppy market, we are making lower highs. Once we break with this
descending resistance and we have a bullish crossover right here, we can
trade end-of-day expiration options or buy end-of-day calls on cable with
this setup. As you can see, it is very important to use previous highs and
lows or previous support and resistance for confirmation of these setups. I
mean, you can certainly trade only the crossovers. But if you want to be
more accurate and if you want your winning ratio to be higher, you might as
well get confirmation from previous highs or previous lows or immediate
support and resistance, just as in this case.

Now, there’s some considerations that we’re going to go through before
going through the empty floor platform. Always use immediate support and
resistance levels to confirm the moves before you buy your options. You can
trade an end-of-day expiration option and still scalp the same instrument
with both systems.

Let’s say that you’re at the beginning of your trading session, and you are
analyzing the Euro/US dollar. At the beginning of the session, you find a
bullish crossover on the Euro/US dollar. So you buy an end-of-day
expiration option. But then again, you can always go to the five-minute
chart and plot the seven-11 system on it and scalp the same Euro/US dollar,
even though you have already bought an end-of-day expiration option with
the slower system. This means that you can actually use both systems on the
same financial instrument that you are trading.

Never trade MA crossovers in range and choppy markets, and this is a must.
This you need to understand and get inside your heads, because if you start
to trade moving average crossovers in ranging markets and choppy markets,
you are going to burn your money because you need trending market for the
moving average crossovers to work. If you actually use them in ranging
markets, you are going to be buying options with a lot of false signals. So
always wait for ranging markets.

Here’s how to know if we are in a ranging market or not. If price is below
the moving averages, we are in a bear market, and we are looking to buy
puts. If the price is above the moving averages, we are in a bull market
and looking to buy calls. In both cases, look for a correction, and then a
crossover with the direction of the trend. This means that if we are in an
uptrend, we are going to wait for a correction to the downside, and then
move to the upside with a moving average crossover or a bullish moving
average crossover for us to buy calls. If we are in a downtrend, we are
going to wait for a move to the upside, and then a continuation of the move
to the downside with a bearish moving average crossover for us to buy puts.

We can also trade turning points or what we call tops and bottoms. But when
we’re trading tops and bottoms, we look for confirmation on breaks from
previous highs or lows. I mean, for us to be able to counter-trend trade,
we need, of course, the moving average crossover of the system, and we need
price action to break with the previous structure, meaning that if we are
in an up-market, and we have hit a turning point and we get a crossover
signal, price needs to take out the previous lows and start making lower
lows. It’s the same case if we are in a down-market. If we are in a down-
move, and we have hit a turning point or a bottom and we get a bullish
moving average crossover, we need to wait for price to break with previous
highs or resistance before we can actually buy our calls.

Now, let’s go to the empty floor platform. Welcome back, traders. Here’s my
empty floor platform. We are going to analyze the GBP/USD one-hour chart
with the slower moving average crossover system and the Aussie/USD five-
minute chart with the faster moving average crossover system. Let’s start
with cable. This is how you actually insert the moving averages. You go to
your insert-indicator button. You choose moving average, and then you
actually just change the period of each moving average when you are
plotting them. In this case, we are going to use a 15-period moving
average, which is the orange moving average, and a 30-period moving
average, which is the black moving average.

As you can see here, what we’re going to use is previous areas of support
and resistance, and we have one right here. Okay? When we were in this
choppy market and we, of course, bottom or based right here. So when we hit
this area of support and make a double-bottom, we can know for sure that we
have hit a turning point. Okay?

When we have the moving average crossover, meaning that the faster or the
trigger moving average crosses above the slower moving average, we have, in
this case, a signal to buy calls and an end-of-day expiration option. We
have expired in the money. If we go backwards, let me just get rid of this
line. If we go backwards, let’s say here, here’s a good example of how to
use the moving average crossover when we are trading with the direction of
the trend. In this case, we are in a down-move. Right here, you can see
that we made a correction to the upside. Okay?

For this to be a truly turning point, not turning point but trend reversal,
we have to take out this previous low. In this case, we did, and we started
to move lower. When we get another crossover, bearish crossover in this
case, when the 15-period moving average crosses below the 30-period moving
average again, we have a signal to buy puts right here with the direction
of the trend. An end-of-day expiration option would have expired in the
money.

In this case, we have a correction, but we do not get the moving average
crossovers. So we can’t trade this correction. Here, we hit a turning
point. Okay? You can see that it is actually a turning point because, in
this case, we are making lower highs. We have here another lower high,
another lower high, and lower highs right here. Okay?

When we actually take out the previous high right here, which is also an
area of previous support, we know that the trend has reversed. Right here,
when we get the moving average crossover, we have a signal to buy calls for
an end-of-day expiration option that would have expired in the money.

Remember that, in this case, we were trading around noon. So volatility was
very scarce. Well, for these moving average crossover systems to work, you
actually need to trade on very liquid markets or on trading hours. Okay? In
this case, we have another very interesting moving average crossover right
here, on a turning point. Okay? We tested this area three times. One, two,
three. When we broke with this low right here, we have another signal to
buy end-of-day expiration options with the faster moving average.

Since we have swift on the direction of the trend, we are now in a down-
move. Okay? Here, we have a correction to the upside. This is what we were
talking about, guys. We have a very deep correction to the upside. As you
can see, we actually had a moving average crossover, a bullish moving
average crossover. But because we are in a bearish market, we are not going
to trade it just yet. Okay? We are going to wait for it to continue to the
downside. When we have this moving average crossover, we have a signal
here. Well, this is the crossover and the actual buying put signal is here
for an end-of-day expiration option that you clearly see that expires in
the money.

Now, let’s go to the Aussie/US dollar five-minute chart. As you can see,
let me just thicken this out for you. As you can see here, when we get the
moving average crossovers in a faster-paced environment, we have to be
quick. Okay? Right here, we were actually making higher highs, higher lows,
and we were kind of making what looks like a triangle here. Okay, or a
wedge.

When we break with these lows, it means that we have broken with this
structure. So look for the moving average crossover. When we get the moving
average crossover here, we can actually trade or buy puts in this currency
pair, for a 50-minute to hourly expiration option. You can see here, if you
buy puts right here, one, two, three, your option would have expired in the
money, as well as the hourly expiration option.

If you go further back, you can see that here we are in an up-move, and we
are making a correction to the downside. This is called a flag, guys. In an
up-move, sometimes price . . . Well, most of the times, price will correct
in a formation that is called a flag. This is the pole. The main move is
the pole. The correction is the flag. When we break with the flag right
here, we have a moving average crossover to get back on the overall move.
In this case, I would choose to trade an hourly expiration option, maybe a
30-minute expiration option, just because we are breaking with a very
strong continuation pattern. Okay? You can see that even the 50-minute
expiration option will have expired in the money. But to be a little more
certain that we are going to make money out of this trade, I would have
chosen a 30-minute to hourly expiration on this particular setup. This is
basically how you use these two systems that you just learned.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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