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Moving Average CrossoversтАФPrice versus MA

One of the most traditional and time-tested methods of moving-average application is the price-cross-above-MA method. The relationship is a very simple one indeed.

As long as price is above the MA, trend is defined as up As long as price is below the MA, trend is defined as down

When price has been below the MA and then crosses above the MA, the trend changes from down to up. When price has been above the MA and then crosses below the MA, the trend changes from up to down. Figure 4-1 illustrates the basic relationships using a 9-period simple MA on a 30-minute T-bond futures chart. Note my comments.

Day traders may use price/MA relationships and crossovers to generВэate buy-and-sell signals as indicated in my illustration. As an aside, please note that my comments here are offered within the constraints of the limitations I have previously given you about the use of moving averages. The simple rules are:

Buy when price closes above the MA after having been below it. Sell when price has been below the MA after having been above it.

Using these rules yields many false signals, generates considerable comВэmissions, and in the long run (or short run in this case) results in more heat than light.

There are two ways to overcome the above problem. First, adjust or fit the length of the MA to the market, and, second, determine which time frame is best. Here are some of my suggestions.

1.Вр Length of the MA

Typically, the length of the moving average should be adjusted to accomВэmodate the characteristics of the market which is being traded. In some cases, a slower MA serves the purpose better than a faster MA. Figure 4-2 shows the same market as Figure 4-1 but with an 18-period MA.

As you can see, the results are much, much better. And Figure 4-3 illustrates the same MA, 18 periods of 30-minute data on Swiss franc futures. Note my comments on each chart. You can see that buy signals occur when the closing price for each price bar has crossed above the moving-average price, which is the solid line. Conversely, sell signals occur when the closing price for a given price bar falls below the MA value. The relationships are extremely simple and mechanically applied.

2.Вр Time Frame

The best time frames for a day trader are from 1 minute to 30 minutes. I can tell you from personal experience that if you want to go crazy you'll use a 1-minute time frame for trading. If, however, you want to retain some degree of sanity and order in your life you'll use a 5-minute time frame at the shortest. Many traders swear by the 3-minute charts in Standard & Poor's (S&P). I think this has merit as well. You will, howВэever, have to decide what you want to do with your time. Trading by 3-minute charts, even by 5-minute charts, will require you to be "glued" to your price quotations. Most of the methods and techniques I'll disВэcuss in this book will be applicable to time frames ranging from 5 to 30 minutes.