It is possible to make money using a countertrend approach to trading. However, for most traders the easier approach is to recognize the direction of the major trend and attempt to profit by trading in the direction of the trend. This is where trend-following tools can come into play. Many people misunderstand the purpose of trend-following tools and try to use them as separate trading systems. While this is possible, the real purpose of a trend-following tool is to suggest whether you should be looking to enter a long or short-term trading positions. Now, let’s consider one of the simplest trend-following methods – the moving average crossover.
A simple moving average represents the average closing price over the number of days in question. To elaborate, let’s look at two simple examples – one longer term, one shorter term. (For related information on moving averages, see Exponential Weighted Moving Average.)
It is possible to make money using a countertrend approach to trading. However, for most traders the easier approach is to recognize the direction of the major trend and attempt to profit by trading in the direction of the trend. This is where trend-following tools can come into play. Many people misunderstand the purpose of trend-following tools and try to use them as separate trading systems. While this is possible, the real purpose of a trend-following tool is to suggest whether you should be looking to enter a long or short-term trading positions. Now, let’s consider one of the simplest trend-following methods – the moving average crossover.