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The crossover strategy is popular and easy to use and identify, but it can also be troublesome because of its tendency to generate conflicting and false signals unless it is confirmed by other types of data.

Crossovers are thought to signal momentum change in the markets. When the main indicator crosses a predefined signal line, the trader will interpret this as a warning sign that something is changing with respect to either momentum of the price action, or its direction. But as we mentioned, crossovers are relatively common, and a strategy based on them alone is unlikely to work well in the absence of confirmation from other sources.

The signals generated by a crossover can be useful in a ranging or trending market, but in a trending market, a crossover is a less significant development than in a ranging market.

Let us examine the various basic crossover strategies.
Moving Average Crossovers

Moving average crossovers occur when a faster moving average rises above or false below a slower one. For example, when a 13-day SMA (simple moving average) rises above a 100-day SMA, or when an 14-day EMA falls below a 50-day SMA, we will be studying a moving average crossover. In this type of crossover, the signal line is not static, and must be provided by the trader manually. This flexibility makes MA crossovers much more adaptable to changing market conditions, and in trending markets, MA’s can be greatly useful for our trading choices.

MA crossovers can be useful for both range trading, and trend following, but since moving averages generate smoother and more reliable signals in trending markets with relatively low volatility, the most successful use of the MA crossover is also in a trending market. Many traders choose to use a simple moving average for the slower MA, and an exponential moving average for the fast component. But this is not a necessity. Depending on the preference of the trader with regard to indicator sensitivity to price action, an EMA can be used or discarded altogether.
n this hourly chart of the GBP/CHF pair, we see an approximately three-day long range pattern developing between 1.5851 and 1.6041 price levels, with the 13 hour MA depicted in red remaining consistently below the yellow 100-hour MA for the entire duration of this period. The price fluctuates between the temporary support and resistance lines (shown as red lines on the graph), and the faster 13-hour moving average settles to a very quiet consolidating pattern in the same period. Neither the MA not the price action gives any meaningful signal with respect to the future, until the eventual breakout occurs.

At around 5 am on the 12th March, we see a sudden spike in the price action, which quickly causes the more sensitive 13-hour simple moving average to spike up also and eventually to rise above the yellow 100-hour simple moving average, and a crossover occurs, and after the price keeps rallying powerfully, reaching riught up to 1.68 eventually. In this scenario, the significance of the crossover is amplified by the long duration of the preceding consolidation pattern, and the quiet and subdued price action. Since markets rarely remain so quiet for a protracted period of time, the eventual crossover creates a very reliable signal for the violent upswing of the price.
Before examining this chart, let us first note that the moving average crossover, and the RSI are both lagging indicators. While using them together on a trend pattern to identify peak values, while filtering the false signals by usage of the crossover is surely possible, the trader must be judicious in selecting the more reliable scenarios by concentrating on the most extreme indicator values.

Here, as in the previous example, the yellow line is the 100-hour SMA, and the red line is the 13-day SMA In this hourly chart of the GBP/USD pair we note that the RSI remained above 50, closing to and exceeding the 70 level for a number of times in the period leading to the MA crossover. A short while after 9th February around 4 pm, when the price itself peaked, the RSI entered two day long downward move which kept it under 50 for that period. Similarly, around midday on 10th February, an MA crossover occurred, with red 13-hour SMA moving below the yellow 100-hour SMA. Confirmed by both the bearish MA crossover, and the RSI value under 50, the price made a 500 point move which could be exploited in its entirety if the trader had opened a position as soon as the MA crossover occurred.
We will keep discussing the possible technical strategies that can be implemented by MA crossover on the same hourly chart of the GBP/USD pair. As before, the red line is the 13-hour SMA, the yellow line is the 100-hour SMA, while the dotted green lie is the parabolic SAR. In order to make it more convenient for the reader, we have delimited the period we will study with the two red vertical parallel lines on the chart.

This time, the change in the direction of the price action is indicated by the parabolic SAR first, as it rises above the price, and signals a period of downward movement at around 10 pm on February 9th. As expected, the price enters the hourly downtrend, and keeps moving in that direction, and a short while later we receive the final confirmation of the hourly downtrend as an MA crossover occurs, with the 13-hour SMA moving below the 100-hour SMA, constituting an sell signal for the trader.

Finally, the price collapses, and remains below the parabolic SAR to around 11 am, February 12th, when our signals are negated with the parabolic SAR rising above the price action. Similar to the above, if the trader had held his position from the time of the crossover until the negation of the parabolic SAR signal, a 500 point profit would be easily achievable. Even after the downtrend dissipates, however, the 13-hour SMA remains below the 100-hour SMA, demonstrating the unreliability of crossovers when used alone.
Using MA crossovers with the Heiken Ashi is both easy and simple. In this hourly chart of the EUR/CHF pair, we denoted the 13-hour SMA with light green, while the yellow line depicts the 100-hour SMA, as in the previous examples. The Heiken Ashi allows us to better evaluate the strength and direction of the price action, and its coloring is more solid than that of the candlestick chart.

On 16th December 2008, the price falls below both the 13-hour, and 100-hour simple moving averages, while at the same time moving average crossover occurs, as the 13-hour SMA itself moves below the 100-hour SMA. Apart from the moving averages, the Heiken Ashi also turns red, and confirms that a period of downward price action is to be anticipated. All these expectations are realized as the Heiken Ashi remains overwhelmingly red for about 13 days, and the price itself rarely manages to rise above the 13-day MA. By using this strategy, the trader could have realized a 1000 –pip profit in just 13 days, while placing his stop-loss, or take profit order on the 100-day SMA.

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