Trading Shares Using Moving Average Crossovers

Many investors, after seeing huge falls in the value of their portfolios, are now turning to trading as a preferred method of making money from the stock market. This gives you the advantage of being able to go short as well as long so you can, if you prefer, look for weak companies rather than strong ones. So what is the most effective trading strategy?

Well there are lots of different strategies you can use but one strategy that I like to use when trading stocks is the classic moving average crossover. This makes use of exponential moving averages (EMAs), and although not perfect, it is generally more effective than the other moving averages because it is weighted towards the very latest prices.

What you do here is to first of all identify the longer term trend for a particular stock. You ideally want to find one that is trending in a certain direction on both the weekly and monthly charts. Then you plot the EMA (5) and EMA (20) on the daily chart and wait for a crossover to occur in the same direction as this trend.

For example let's say company X is trending downwards on both the weekly and monthly charts. Because it is in a downwards trend you would be looking to go short on any occasions when the EMA (5) crosses downwards through the EMA (20) on the daily chart, and it is confirmed when the candle or bar for that day closes.

This method of trading is generally quite an effective way of trading stocks because for a start you are always trading with the long-term trend. Plus these set-ups generally occur soon after a period when the stock briefly moves against this long-term trend, so it provides an excellent entry point.

So if you are looking for shares to short, then you want to find shares that are trending downwards on the weekly and monthly charts, and then go short when the EMA (5) crosses downwards through the EMA (20) on the daily chart.

Similarly if you are looking for long positions or want to actually buy shares in companies, then you want to look for shares that are trending upwards on the weekly and monthly charts, and then go long or buy shares when the EMA (5) crosses upwards through the EMA (20) on the daily chart.

Not all of these crossovers will turn out to be profitable but a fair number of them will. The key is to cut your losses as soon as possible after it appears that a crossover is not going to yield any profits. If you can run your winning trades for as long as possible, then you can potentially make some decent returns.

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