How to use moving average crossovers for swing trading? Lets find out!
As swing traders, we want to recognise and ride this trend for as long as possible.
In the world of stock market, there are numerous trading setups that traders opt for. With the development of mathematical formulae and advanced trading software, traders, nowadays, are gifted with many technical indicators that provide futuristic trends & probabilities. Despite the technological advancement, the technical indicator that has not faded away is the moving average.
Before explaining the headline, we need to understand what a moving average is! In simpler words, it is an average of all the prices in a given time. For e.g: A 50-day MA is the average of all the closing prices of the last 50 days. Plotting the points on the technical chart smoothens out the price curve and removes the noise. It helps us to understand the short as well as the long-term trend of a security. Now that you have understood what a MA is, we shall now focus on the mainstream topic of this article - moving average crossover.
As the name suggests, a moving average crossover is a setup when one moving average crosses above/below the other moving average. Obviously, here, we need two moving averages. The two moving averages need to have different periods, such as 20-DMA and a 50-DMA, or a 50-DMA and a 200-DMA. A moving average crossover primarily indicates a change in the trend of the security.
As swing traders, we want to recognise and ride this trend for as long as possible. Moreover, it helps to identify potential entry and exit points in a trade. However, there are some points that go against this setup, one being that MA is a lagging indicator so it generally produces lagging signals. With the help of good judgement, traders can find MA crossovers extremely beneficial.
In general, there are two popular crossovers: A Golden Cross and a Death Cross. A Golden Cross is when a short-term 50-DMA crosses above the long-term 200-DMA, indicating exhaustion of a long-term downtrend and a beginning of an uptrend. On the contrary, a Death Cross is when a 50-DMA crosses below the 200-DMA, signalling the start of a downtrend.
Here, we have presented a couple of good examples of MA crossovers, which shall help you in identifying trends:
The above chart is the daily chart of Hindalco. On June 7, a ‘Death Cross’ was seen on the technical chart. What followed next was a 25 per cent fall in the stock price as it plunged to hit its fresh 52-week low at sub 320 levels. Interestingly, if you observe, the downtrend started well before the Death Cross. This indicates that MA crossover is lagging but confirming the trend identifier.
During these bearish market conditions, we have found a golden crossover in a stock for you. Keep an eye on this stock as it can clear your MA crossover concept. Happy trading!
