Trading strategy · Trend Following
Moving Average Crossover
Ride big trends with two simple lines.
▶ Watch the free video lesson with TomWhat it is
A fast moving average reacts quickly to price, a slow one reacts slowly. When the fast line crosses above the slow line, momentum has shifted up and the strategy buys. When it crosses back below, the strategy exits. It is one of the oldest and simplest systematic trend strategies.
How it works
- Plot a fast simple moving average (e.g. 10-period) and a slow one (e.g. 30 or 50-period).
- A "golden cross" is the fast line crossing above the slow line: a bullish signal.
- A "death cross" is the fast line crossing below the slow line: exit longs, or go short.
- The strategy is late by design. It gives up the first and last part of a move to catch the middle.
- Works best in trending markets and loses money in sideways chop, so add a filter.
The rules
| Entry | Buy at the close of the candle where the fast MA crosses above the slow MA. |
|---|---|
| Stop loss | Below the most recent swing low before the cross. |
| Exit | When the fast MA crosses back below the slow MA, or trail under the slow MA. |
| Filter | Only trade when the slow MA itself is sloping in your direction. |
Pros
- Very simple and fully objective
- Captures large trends
- Easy to backtest and automate
Cons
- Lags: enters late, exits late
- Many false signals in ranges ("whipsaws")
- Low win rate; relies on a few big winners
Common mistakes
- Trading every cross in a flat, sideways market
- Optimising the MA lengths until the backtest looks perfect
- Exiting winners early, which removes the big trends that pay for the losses
Lesson transcript
Welcome to lesson one: the moving average crossover. It's one of the simplest trend following strategies in the world, and a perfect first strategy to learn. Here's a market falling steadily. Notice how hard it is to tell, candle by candle, when the trend is really over. That's the problem moving averages solve. They smooth out the noise. We add two lines. The blue one is a ten period average. It's fast and hugs price. The orange one is a thirty period average. It's slow and shows the bigger trend. Now watch. Price turns up, the fast line curls higher, and right here it crosses above the slow line. That's called a golden cross, and it's our buy signal. We enter at the close of that candle. We place our stop below the last swing low, and then we simply hold. As long as the fast line stays above the slow line, the trend is our friend. Eventually momentum fades. The fast line rolls over and crosses below the slow line. That's a death cross, and it's our exit. We didn't sell the top, and we didn't buy the bottom, but we captured the big middle of the move. Here are the rules. Enter on the cross. Stop below the swing low. Exit on the opposite cross. And filter: only take signals when the slow average is sloping your way. Now the warning. In a sideways market, these lines cross back and forth constantly, and every cross is a small loss. Traders call this whipsaw. This strategy wins big in trends and bleeds slowly in ranges. Accept that, and keep your losses small. Recap. Two averages, fast and slow. Buy the golden cross, exit the death cross, and only trade in the direction of the slow trend. Simple rules, big trends. See you in lesson two.
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