The moving averages method is believed to be simple and flexible method of calculating the average currency price over a certain time period. However, a Forex trader may be confused on the selection of the time period for moving averages. If the trader wishes to compare two moving averages with two different time periods, the best method to go for is the Double Crossover Method. Instead of one moving average pattern, the trader can select a short-term and a long-term moving average on the same screen and compare the two for deciding on the future price trend. In simple words, it is about using two moving averages to generate trading signals.
The double crossover method helps generate buy/sell signals with the use of two moving averages patterns. Trading decisions can be made in a simpler way with this method. When the shorter average pattern crosses over the longer one, the signal indicated is a “BUY (Bullish)” one. Similarly, when the longer average pattern crosses over the shorter one, the signal is taken as a “SELL (Bearish)” signal.
There are many combinations in which the double crossover method may be employed. Some popular combinations used in this method are 5-20 DMA (Days Moving Averages), 20-50 DMA or 10-50 DMA. Though this method may give some misleading signals known as “whipsaws”, but it yet lags the market due to use of historical data. This method may not have the trader exactly near the dot trend, but gets him somewhere closer to the same. Still, double crossover moving average method is considered to be one hand above the traditional simple moving averages method. The reason for the same is that the double crossover method uses two patterns of moving averages instead of one.
We have tried to explain this concept through a graphical example above. The pink line in the graph above represents a 5-DMA and the red line represents a 20-DMA. At the lower end of the graph, you can see the pink line crossing over the red line. Since the shorter moving average crosses the longer one, the intersection point is indicated as a “BUY” signal. Similarly when the longer moving average crosses over the shorter one at the top of the graph, the intersection point is a “SELL” signal.
The double crossover method is apt for currencies those follow the trends than market ranges. Some traders may question the use of closing prices of currencies while calculating the moving averages. Some may use a mid-value price, while few others may use price bands for day’s high & lows prices. Altogether, use of two averages for crossover can help detect buy/sell signals more effectively.
While analyzing crossover trends, a trader must see that the moving averages cover a lengthened time span. If the time span covered is less, lesser is the use of the trend to understand the signals. If the moving averages show a flat direction or a turned movement, it means that there can be trend reversal. Hence a trader must evaluate the trend patterns correctly to understand the right signals