Double Crossover Method

One answer to the dilemma of what period to choose for a moving averages is to use more than one moving average on the same screen. In this way a trader can have both short term and long term moving averages that he or she can compare to the price action. Some moving average pairs that are popular are 5 and 20 day and 10 and 50 day averages. In the figure below I present a 21 (in purple) day and a 100 (in black) day MA. The 100 day MA starts above the price and short term MA because it is factoring in high prices from the further past in its calculation.

With two averages a trader would use the double crossover method.

• This method would generate a buy signal when the shorter average crosses above the longer.
• A sell signal is generated when the shorter average crosses below the longer average.

This method has the advantage of producing fewer whipsaws, but has the disadvantage in that it lags the market. The only signal in the above graph came in August when the shorter moving average crossed above the longer average signaling a buy of the Euro –/ sell of the Japenese Yen.

Using High and Low Prices for a Moving Average

Another question that a trader might ask is “why use the closing price when creating a moving average?” Some analysts do not use the closing price and instead prefer to use the midpoint value, which divides the day’s price range by two. Others will create price bands by placing moving averages of the high and low prices of the day separately. These two separate moving averages can then act as a sort of volatility buffer or neutral zone. Figure 6 below shows this as a visual example.

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