Perhaps one of the simplest trading strategies of all is that forex action reaction theory the moving average crossover. Simple and exponential crossover strategies have a wide variety of uses.
They are straightforward yet can be surprisingly effective. Crossover is best suited to trend following and momentum strategies. A number of sophisticated trading systems use crossover as their underlying approach. The principle behind the crossover system is that it tells us a trend is changing. To understand this, take a look at the four charts in Figure 1.
2, the price line starts to fall. 3, all three lines are falling. The price, moving average 1 and moving average 2 are now all on the same path again after the price changed direction from rising to falling. 4, the price starts to rise again and the same process happens again but in reverse. The blue line is the first to react to the price turning followed by the red line. The length of time that the moving average uses in its calculation is the period.
Moving average 1, the blue line, is a fast moving average because it uses fewer data points, or a shorter time period in its calculation. Moving average 2, the red is a slow moving average because it takes a larger sample of points and therefore has a slower reaction time to changes in price. The longer the period of the average, the more stable the line is but the slower it is to react to changes. Crossover Events A crossover occurs when two different moving average lines cross over one another.