One of the most used moving average crossovers is the MA20 and MA 50 crossover. It has served both traditional day and swing traders over the years.
Today, I want to take another look at it, and help those that are still misusing that moving averages crossover. Let's get started.
How People Misuse MA 20 And MA 50 Crossover?
As soon as a crossover is established, people just buy or sell. That is wrong. Indeed, those traders that were misusing the MA20 and MA50 crossover have more losing trades than winning ones.
One of the reasons why they are having more losing trades is because the price is 90% of the time at a key resistance level as soon as a bullish crossover MA20 and MA50 takes place.
On the other hand, it is at a support level as soon as a bearish crossover MA20 and MA50 occurs. Generally, just before that unique crossover takes place a strong momentum is building. Consequently, that strength often pushes the price to a key level at the same when the crossover is happening.
That is why, one must wait for a higher low after the bullish crossover and a lower high after the bearish one. One that is taking position soon after that crossover MA20 and MA50 can be cooked like an open fish in the flame of a Bali's chef kitchen (Bali Indonesia).
Please do not do that. One may get away with that if one is using instead MA 30 and MA 50 crossover. The MA20 and MA50 crossover is unique and special. One must properly learn how to trade it.
One example would be MA20 crosses above MA50 on the daily chart and after that the price forms a higher low. I mean a pull-back and the common sense trend line is broken.
Once the setup occurs on the daily chart, it makes sense to check the monthly chart to verify if everything is aligning nicely ( draw all monthly chart key levels and channels). Next, head to the hourly chart and wait for a valid signal. Put the stock on a bullish watchlist and wait for a clean cut gorgeous trade signal.
When the signal is in place, time the entry on the 10M chart like a pro without ignoring the economic news. If the the market (SP 500) is very bearish do not take a bullish trade. The opposite is also true.
Apart from the daily chart, technical traders also love to trade MA20 and MA 50 crossover on hourly, 2-hour and 2-day charts. The aim is to first find a trading setup, and then break it down to a lower time frame.
Truly, one can use the MA20 and MA50 crossover trading setup on all times frame.
Warning Never use one time frame when deploying MA20 and MA50 crossover trading strategy. Use at least two times frame. Alright?
Please do not forget to validate the setup on the immediate higher time frame. This is too important because one does not want a dodgy setup, but robust that one has validated. Am I talking too much? Alright, now you get it.
Contrarian MA20 And MA50 Crossover Trading
This is more for experienced and agile day traders or scalpers. If you are still a hobbling technical trader who is still shooting all directions aimlessly then please do not try the contrarian MA20 and MA50 crossover trading strategy.
I mean it because you may lose fast. With that approach, one is trying to sell when the price is a key resistance level because of the extreme bullish momentum that has caused the bullish crossover (as I already explained it).
Similarly, one is trying to buy at the key support level after the initial surge the the bearish momentum that caused MA20 to dip below MA50. Those are contrarian trades because the momentum has peaked, but one wants to gently initiate a contrarian trading position before flowing with the price-action when it resumes its dynamic move.
Similarly, when the bearish momentum has peaked at the time when MA 20 dips below MA 50, one is trying to buy first before selling on the edge after that small rally that one has bought. It is a risky trade if one does not know how to manage it.
Truth About MA20 And MA50 Crossover
Any time one is using MA20 and MA50 crossover trading strategy, one is in fact using just the MA30 trading strategy because the difference between 50 and 20 is thirty.
Really, saying MA20 crosses above MA50 means, there is a high chance that MA30 will be rising. The opposite is also true. As you can see, the MA30 is a very good momentum indicator, but instead of using just the MA30, it was more useful (practically) to use MA20 and MA 50 crossover.
This an essential topic for all moving averages technical traders.
A simple way to boost a momentum trading strategy is to combine it with the trading volume. The momentum refers to the rate of change or speed of the price-action. The trading volume is about the fuel. One knows that all vehicle must have enough fuel to continue to speed up more.
Without the feel even a high speed vehicle like a Ferrari will not go far. It makes sense that one combines the moving average 20 and fifty crossover trading with the trading volume.
Usually, a surge in the trading volume will occur before a valid MA20 and MA50 crossover. Sorry, I will not dwell on that for now. In fact a TSTW trader must work hard to master the trading volume.
One can make excellent trading decisions just by mastering the magic of MA20 and MA50 crossover.
When one combines that momentum trading strategy with the trading volume, one will find better high probability trade setups. One should avoid rushing to buy or sell after a bullish or bearish MA20 and MA50 crossover because of the contrarian technical traders.
Though, one can apply MA20 and MA50 crossover trading strategy on every time frame, the best time frame for it is the daily chart. One that is using a moving average trading strategy must also draw all key support and resistance levels and channels and validate the setup on the corresponding higher time frame.
A top-down trading method without ignoring the economic news is always recommendable.
That is it. Thank you for reading. I hope this article is useful. If you say yes, then please share and bookmark it. I will really appreciate it.