The Euro is coming back versus the dollar with the EUR/USD ending a period of range trading. Bearish bets on the euro have eased, and this is apparent in the latest technical buy signal, the golden cross.
One of the easiest and most common trending systems to use is the Double Crossover Method. This simple system uses two moving averages. The most-used combinations are the 5 and 20 days, along with the 10 and 50 days. Some traders also prefer to use a different moving average. Some prefer the exponential moving average or the weighted moving average.
For the EUR/USD daily chart below, we will be using the 5 and 20 day simple moving averages.
A buy signal is given when the faster, 5 day moving average (green) line crosses above the slower, 20 day moving average line (red).
A sell signal is given when the faster, 5 day moving average line (green) crosses above the slower, 20 day moving average line (red).
Since the last signal (sell) in mid-August, the system underperformed with a loss close to 100 pips. The system works the best when the markets are in a trending phase. For traders who use the double crossover system, the last two weeks have been a range trading environment which is not preferred. The previous buy signal that was triggered in early June was much more profitable, netting somewhere around 640 pips.
Certainly other parameters must factor into the equation before a trader takes a position in the market. As the markets may only be in a trending phase 50% of the time, with the other half of the time spent in a range trading period, traders need to identify where the long term trend is and if indeed the market is showing signs of a trending environment.
One tool for identifying the trend is the ADX indicator. This discussion won’t dive into the specifics of the ADX indicator, but it is used to identify a trending environment versus a range trading environment.
Looking to the far right edge of the chart below, traders can see the 5 day moving average line should cross above the 20 day moving average line by the end of today’s trading. Once a cross is made, this is a signal for those traders who use the double cross over method to close out short positions and go long on the EUR/USD.
Disclosure: No positions