Day Trading & Forex Forum

Figure 8. A dead cross signal generated by the intersection of the 10- and 40-day moving averages on the euro/yen chart. (click to enlarge)

The intersection of two moving averages that move in the same direction is called a golden cross. This intersection provides a more reliable signal that the currency will continue moving in the same direction. See an example of a gold crossover in dollar/Swiss franc in Figure 9. 

Figure 9. A golden cross between the 10-day moving average and 40-day moving average on the daily dollar/Swiss franc chart. (click to enlarge)

A strategy involving three moving averages is called the triple crossover method. The intersection of short and middle lines provides a warning signal, and the intersection the middle and long averages should give a trading signal.   Let’s take the example of the signals generated by the combination of the fast 5-, 10- and 20-day moving averages. As shown in Figure 10, the warning to buy dollar/Swiss franc signal occurs when the 5-day moving average crosses the upward moving 10-day average. The buying signal occurs when the 10-day moving average crosses the 20-day average upward.  In reality, the warning signal, pointed by the first arrow, worked as a buying signal.  Meanwhile, the buying signal was late and would have led to a losing trade.

Figure 10. A warning signal (first arrow) and a buying signal (second arrow), generated by a combination of the 5-, 10- and 40-day moving averages on the daily dollar/Swiss franc chart. (click to enlarge)

Number of Moving Averages

Generally, traders should use at least one an up to four moving averages in order to capture signals in different time frames. There are no general suggestions in terms of the number of averages to use or their length. Remember that some markets are more volatile than others.

In terms of length, some of the more popular combinations are 4-9-18 days for the very short-term oriented traders and 5-20-60 for the medium-term traders. In addition to plotting moving averages on a daily basis, traders can use any other periods, whether short-term or long-term: 15 minutes, hourly, weekly, etc.
 
In conclusion, moving averages are good flexible support and resistance lines that also point overbought and oversold conditions. Their intersections are slow in showing directional changes and entry/exit points. Use intersections between the currency and the moving averages intersections to traded and moving averages intersections as confirmations for existing positions.