Double Moving Average Strategy is when you buy when a short period moving average crosses above the longer period moving average.
There are many types of moving averages to use. Simple, exponential, smoothed, linear weighted.
In this example, lets just start with the basics, shall we?
We will be using the simple moving average (SMA) for this explanation.
What is a Simple Moving Average?
A 5 period moving average is the average of the close prices for past 5 period. You may also use the highs and lows to calculate the moving average, but more commonly, the closing prices are used.
Period is the time frame. If the closing price for the past 5 hours are C1, C2, C3, C4, C5. The 5 hour moving average will be (C1+C2+C3+C4+C5) / 5. That a value that will be plotted on the graph as seen below:
As points are plotted, they join and form a curve line on the chart. The blue line is the 5 hour moving average. The yellow line is the 20 hour moving average.
The blue line is the faster moving average as it reacts faster to the latest changes in prices. The yellow line is known as the slower moving average.
Moving Average Crossover Strategy
Now that you know what is a moving average. Let me show you how you can use it in trading.
When the blue line (faster) moving average crosses the yellow line (slower), it shows that the prices is trending up. You can enter the trade, placing a buy order. When the faster moving average crosses back below the slower moving average, its time to exit.
Alternatively, you can play it the opposite direction. Sell when the faster moving average crosses below the slower moving average. And sell when the faster moving average crosses back above the slower moving average.