The moving average crossover method calculates two moving averages, each
based on a different number of periods of trading data. When the
shorter-term (fewer days) average crosses above the longer-term average from
below, this is a buy signal. When the shorter-term average crosses below the
longer-term average from above, this is a sell signal.
Moving averages are used to smooth prices, dampening the distractions of
short price movement so that the underlying trend is clearer. Moving
averages always lag the market and, therefore, will never buy market bottoms
or sell market tops. Like any other trend-following system, the moving
average crossover will perform best when markets are trending because it
automatically places the trader on the right side of every extended move.
When markets are moving sideways, however, the lack of extended moves will
cause losses.
Let’s look at Broadcom Corp. (NASDAQ: BRCM).
We are using 60-minute bars that will help a trader get in faster than using
daily bars. It also allows managing risk better since the stops can be
closer.
The Moving averages that you are looking at are 5 and 20 period exponential
moving averages on 60-minute bars.
On Thursday, November 30, BRCM flashed a Buy signal late in the day.
The expectation is that BRCM continues to move up from here after a large
decline from the last sell signal at 150.
However, a trader must be prepared for another failed rally.
Trading is matter of “trading on expectations”. BRCM should not reverse
back to the 20 period moving average at 100.
If you are long BRCM on go long at the open Monday, I would place a stop and
a stop and reverse at 100.
If BRCM continues up as expected, stay with the trade. If it reverses, get
out at 100.
