by Cynthia Macy, Co-Author of The Day Trade Forex Trading Systems

Trading signals are generated by either the price moving through a moving

average or by one moving average moving through another. We are going to

concentrate on moving averages that cross each other.

We use several different moving average crossover combos, and the choices

you have will be determined by the time frame that you like to trade in and how

early an entry and exit you feel safe and secure with.

Here are the basic crossover combos, listed from the slowest to the fastest.

The slower combos are safer to use and the faster the combo, the more

whipsaws you'll encounter.

9/18/50, 7/18/50, 5/18/50 and 3/18/50 and

7/11/18/50, 5/9/18/50, and 3/10/20/50

and my favorite hybrid, 5,13,26,62

We like all moving averages to be EMA or Exponential Moving Average

(except in The Secret Weapon which uses SMA).

Your “triggers” are the 9, 7, 5, and 3 – notice that they are the first number in

all pairs.

Basically, your buy or sell signal is “triggered” when the first number in the pair

crosses the second number.

For instance, in the first pair, the 9 is your trigger and when it crosses either

above or below the 18, you have a buy or sell signal. If it crosses up, it's a buy

signal; if it crosses down, it's a sell signal.

The 50 is the moving average (MA) long term trend line,. When the price is

above this MA line, the trend is bullish (going up); when the price is below this

line, the trend is bearish (going down).

The fifth, sixth, and seventh pair all have four numbers, instead of just three.

Your first number is the “trigger” and when it crosses the second number, it gives

you a buy or sell signal. And when the second number crosses the third number,

it's another strong signal, signaling a continuation of the trend; when the first,

second or third number crosses the 50, this is indicating a very strong

continuation of the movement.

For example, when the 7 crosses the 11, it's a buy or sell signal. If the 7 or 11

also crosses the 18, it's another strong signal that the movement will be continued. If any or all of them cross the 50, especially at the same time, it's a very strong signal of a continuation of the trend.

In all cases, the 18 is the middle Bollinger Band, that we have adjusted manually

from the default setting of 20, to 18, which is a little faster. We also make it

thicker and a brighter color than the two outer bands.

The “trigger” is our immediate trend line which is showing us the immediate

direction or trend of the price. The second number is the short term trend and

the18 is our medium term trend lines. The 50 is our long term trend line.

In every case, you should only place a trade when the short and medium term

trend lines are also going in the same direction as your immediate trend line.

For instance, if your 7 crosses up through the 18, and you want to go long, if the

11 or 18 is flat or turned down, wait to put on the trade when it also turns up.

However, all moving averages are “lagging” indictors, meaning, that they only show

what has happened in the near past and is not truly indicative of what will happen in the near future.

If you want a clearer picture of what may happen in the near future, you can use a

MACD Histogram, which is a moving average crossover but with some algorithm

changes.  By using the MACD Histogram indicator along with Momentum or RSI and a Slow Stochastic set at 20,5,3, E, and moving average crossovers, you will have

better success.  The Slow Stochastic setting of 20,5,3,E will show you the tops and bottoms of the price movement.

Also, if you see a situation where, for instance, the price is moving down but the MACD Histogram is moving up, the price will eventually follow the MACD.  This is called "divergence" and is a specialized form of technical analysis.

So don't ever try to trade just using moving averages...they will only get you into trouble.

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