Does 50 and 200 EMA crossover work?

Hi guys,

I have been looking at some charts and it looks like trading 50 and 200 EMA crossover would work most times. Can someone tell me is this method reliable and if not why?

Just my perspective: it’s reliable for the 15-20% of the time that the market is trending (and that’s the 15-20% of the time that you don’t need it anyway, because you can see that without indicators), and unreliable/whipsawish the other 80-85% of the time. But markets can sometimes trend for quite a long time, so it’s easy to get the impression that it “works”. Backtesting over 10-15 years’ data typically tells a very different story.

In practice, 50/200 is quite a “long, slow” crossover to be looking at, so it takes longer to realise that that’s so than would be the case if you looked at a 5/20 crossover instead. Both lose money in the long run, and there are, of course, reasons for that. They’re good and valid and objective reasons, and in the long run (which is all that matters, in this game) they’re going to apply to you and to me just like they apply to everyone else.

The great [U][I]mistake to avoid[/I][/U], in my opinion, is to adopt a philosophy of “ok, sometimes it works and sometimes it doesn’t, so what we need is to use it in conjunction with other indicators to ‘confirm’ its signals and try to exclude a significant proportion of the times it doesn’t work”. Some people spend almost lifetimes trying to do this, but they’re not making a living (apart from maybe by selling courses and software!), and the reality - to a skepchick like me - is that they’d actually be better off spending their time trying to prove Goldbach’s conjecture (and there’d be more money in that, too!).

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Don’t know about the ema, but often traders will use the 100 and 200 sma hr1 as a yardstick.

Most recent example I can think of is cable - Gbp/Usd

If you zoom out you will see the 100 sma in action - then zoom in to Friday’s play - now 200 has become the target for the sellers, Friday evening, that line was the place to exit the shorts.

Lots of orders get placed around the 80’s, 20’s - the 200sma agreeing with 3120 was always going to be a seller’s target.

Now, next week there will likely be a few traders keeping an eye on the 200, second eye on the 100.

Crossovers sound too complicated.

From my experience moving average crossover strategies are typically not worth your time as they are crap. Can a strategy work involving a MA cross? Sure I guess if price is in an area of S/R or other factors to back it. Problem with a 50 and 200 ema cross is those lag pretty far behind price so by waiting for a cross in an area of S/R I would be skeptical as they lag so far being by the time the cross happens the move has already played out and you missed the buss.

With that being said the 50 and 200 ema can be of great benefit to keep an eye on as lots of traders do use them for trend direction and dynamic S/R. I personally dont believe the work for accurate S/R level but people do use them and some profitably non the less.

So for instance on the EUR/USD daily chart you have friday closed right on both the 50 and 200 ema. This can be of very significant as you now have a lot of traders eyeing this level for various reasons. This means volatility is going to be high for market open later on today. I dont see a really strong S/R level but there is some minor areas hanging out not to far away.

So to me I would expect to see bulls and bears fight it out to the death and it could get ugly real quick. Both EMA’s could act as support however given the momentum going into the close price might have enough steam to break the support from the EMAs. If thats the case and you got a decent breakout strategy you might be able to retire at the end of the week. Or you might be putting up the house for sale to make up for your losses but hey it sounded good in my head anyway.

As Dr Lexy said crossover strategies work best in trending markets…

A better indicator may be Bollinger Bands (single or double) for what you are trying to achieve…

Have you backtested the crossover for many years, as Dr Lexy suggested?


How to Use Moving Average Crossovers to Enter Trades

Thanks for all the replies. Yes i have backtested 200 EMA on etfreplay .com and it gives nice return, most of the times, on all ETF’s during various timeframes (the longer the better). I’d still like to test it out on Crude Oil because CL tends to trends the most.

Please don’t take this the wrong way, or imagine that I intend it impolitely at all, but as a full-time futures trader, myself, I can [I]promise[/I] you (and that’s not something I say lightly) that if you expect for a moment to be able to trade CL profitably on the basis of a moving average crossover, then “you have another think coming”, to put it very mildly indeed!! :o :23:

(If you take a look around the web at what you can find about CL specifically, and futures trading in general, I think you’ll find it takes very little time to appreciate that “it really can’t quite be that easy”, and - sure enough - there are reasons for that! :wink: ).

This depends a lot on what your exit strategy is. If you are looking at a method where you enter on one crossover and exit-and-reverse on the next crossover it will not work on any market in the long term. If you reflect on the fact that nowadays (and for some years now) there are no end of automated systems that test and optimise each and every such crossover method for every imaginable combination of MA’s - and if such a simple method as a 50/200MA crossover in/out worked consistently then it would have been discovered by such automated systems long ago and we would ALL be multimillionaires by now without even trying.

However, if you are thinking of using the 50/200MA as your entry combined with another method to define your exit then there maybe is more scope for success. But even then there are often periods where such MAs are close together and cross back and forth, whipsawing away a lot of profit if one trades every cross. You would need to define carefully which trading times are most likely to function best and maybe even look for some other indicator to help filter out some of these fake breaks.

There [I]are[/I] traders who favour this combination as an entry method and also look at the slope of the 200 to confirm trending rather than ranging. They also look at the same combination on multiple timeframes such that if, say, a 1H chart is currently upwards then a 15m upward crossover would be worth entering whereas a downward crossover might be short-lived. However, one general problem with MA combinations is that they perform quite well when trends start and have momentum, but give weak and false signals once the trend is weakening and the market goes into post-trend ranging - which is often only recognisable as such after it has been happening for some time and already given a series of quick whipsaws!

I agree…for all that it is worth, I have been keeping my eye on crude oil (WTI) for about a year now,
and have traded it a few times, but there are so many unresolved issues around supply and the Middle East production, and OPEC’s inability to get a general supply restriction agreement, that price really has failed
for months and months to come up to that $50 mark and beyond…

In other words: with wheat and corn you may have seasonal forces that are more directly traceable to price movements (harvest times are set at precise times in the agricultural year) , whereas with crude oil there is no seasonality that is as distinctly traceable, yet it is a physical commodity tied to supply issues but also a highly speculative commodity that can have wild swings without much sense, leaving you wondering …

Also, if you are trading crude oil as a CFD through your broker, you may find that they are monthly expiration contracts, so you may not try a ‘buy and hold’ from the current low levels and just sit on those positions hoping for a move higher (if that is your trading style)… It is not even a ranging commodity at present, more of a choppy, undervalued asset without conviction…

So you would be better off listening to Dr Lexy and avoiding crude oil like the plague… perhaps you would like to trade the highly-correlated asset that is the Canadian Dollar… Pairs like Kiwi-Cad offer good movement… or Cad/Jpy, with slumping oil and reverse-carry trade offering a good shorting opportunity for the medium-term… USD/CAD is a slow burner but again it could offer a good combination to the upside especially in a bullish USD scenario matched by continued CAD and crude oil slump…

Just saying :slight_smile:

nicely put
i believe to those (trade) the market they should admit in high exposure before the loses hit them hard regardless of system godddammit )))
forex cfd futures are same and the market makers going find you , hedge traders anyway and thats norm
fundamentals behind these markets are different and make difference

If you are going to trade futures I would personally look into options and in such a strangle trade. But use caution as with a strangle trade is going to produce a loss 100% of the time but is also a very profitable strategy as you do not need to know what direction the market will go or why all it has to do is move. So when you see a 50 and 200 ema cross price will more than likely move quickly. Before doing said trades do your homework thoroughly because as stated you will lose a trade 100% of the time but can also make a hell of a lot of money

i do that with turbo warrants. its a good strategy. but if the price didnt move enough to make a profit (basicly if both options are still worth something) make sure that you sell them before the expiration date.

Yes off load them fast if price dont move. It only works in a fast moving market with high liquidity. Typically though if a 50 and 200 ema are close enough to make a cross over then regardless if the cross or not there should be enough traders in the market to make something happen. Still have high risk but its probably will have a higher chance of profit than trading a cross itself in the futures or spot markets

I’m sure this is right. It wil be interesting to see whether the outcome of next month’s OPEC meeting changes that. (I watch CL, not WTI, just because I do “CME stuff”.)

Thanks for all the replys. Yes, i have been looking into CL CFD but i will take more careful approach thanks to the all comments in here. So if the MA’s aren’t reliable what is the best thing to turn to?

Profitability & Systematic Trading (Michael Harris)

[I]Trade Your Way to Financial Freedom[/I] (Van K. Tharp) - an outstanding starting-point

[I]Beyond Technical Analysis[/I] (Tushar S. Chande)

[I]The Mathematics of Money Management: Risk Analysis Techniques for Traders[/I] (Ralph Vince)

[I]Understanding Price Action[/I] (Bob Volman)

[I]Naked Forex: High-Probability Techniques for Trading Without Indicators[/I] (Alex Nekritin & Walter Peters)

[I]Daytrading[/I] (Joe Ross)

[I]Trading The Ross Hook[/I] (Joe Ross)

[I]A Mathematician Plays The Market[/I] (John Allen Paulos)

[I]Fooled By Randomness[/I] (Nassim Nicholas Taleb)

[I]Why People Believe Weird Things[/I] (Michael Shermer) - this book and Taleb’s, just above, are hugely helpful - albeit indirectly - for “understanding what’s going on in forums”!

Trading Price Action Trends - Technical Analysis of Price Charts Bar by Bar for the Serious Trader (Al Brooks)
Trading Price Action Trading Ranges - Technical Analysis of Price Charts Bar by Bar for the Serious Trader[/I] (Al Brooks)
Trading Price Action Reversals - Technical Analysis of Price Charts Bar by Bar for the Serious Trader[/I] (Al Brooks)

And last but not least: [B][/B].

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I have been forward testing the EMA 20 50 crossover for about 6 months. it has produced a consistant 40% draw down. The reason appears to be it’s lagging too far behind real price action. It basically misses the bus and runs behind.

EMA indicators are fine for secondary S/R zones are useful for pullback zone information, but again real price action is more reliable. Although I will continue to use them, I will not use them as a entry trigger.

Standard/Common Horizontal S/R lines are more reliable to trade off of and near the tops and bottoms.
And I am currently focusing on trendline analysis. As it uses real price action data, not lagging.

I have come to the conclusion that using any lagging indicator as a entry trigger is not all that reliable, but I have not tested each and every one, just the common 5 or 6 and they are helpful to understand directional bias, but in my opinion, not to be used for triggers and should only be used optionally as a confirmation. Yes this is a blanket conclusion, but it’s the same conclusion I have found in many of the books written from top traders. So, I will take their word for it, and in my mind confirmed their findings as they dont produce reliable consistant results as a stand alone holy grail entry trigger.

EMA crossover strategies only works in strong trending markets, which doesnt happen all that often. I have pretty much concluded that my 20/50 ema cross over strategy is a sure way to lose. Perhaps if I took the opposite trade all the time it would produce 40% gains… lol, just kidding, I am tossing it in the bin as a failure.

This is just my opinion, but I would suggest you have a look at price action strategies. Forex is far to volitile for EMA crossover strategies to be reiable in the long run.

It all depends on how one constructs one’s charts. The problem begins when one picks the indicators first and then starts to see how they work out. The better approach is to look at a bare chart and from that decide what you would like an indicator or line or pattern or candle grouping, etc to tell you. From there one can painstakingly go through a process of selection and rejection until one finds the application that is answering one’s needs.

It is clear that using any combination of any kinds of MA’s (and there are many) purely on a crossover entry/exit basis will never work. This is the simplest application that any robot could try and obviously would already be widely used and producing new millionaires daily if even one combination crossover would actually be consistently profitable.

However, I don’t think that is reason enough to bin MA’s or to extrapolate that conclusion to cover any and every other indicator as well. Nor is it sensible to misleadingly group all these as “lagging” and therefore useless when PA itself also refers back to previous price levels in order to have any meaning. If I were to say that the current price is, for example, “87.50” who can tell me where it might go next without some kind of reference to previous price action whether it be a line, an indicator or simply visual?

One just has to select through trial and testing what kind of supportive addition provides a reliable indication of the most likely successive action relative to where we are now. Whether that is based on previous price action, earlier similar patterns, star constellations, tea leaves or a twinge in one’s left foot - if it works for you then use it :slight_smile:

For example, I use displaced MA’s a lot as a method of speeding up the reaction time of MA’s to current price action precisely because of the volatility in forex markets. At the same time I also use normal EMA’s to define an underlying trend.

By way of example, here is a 3H chart of the EURUSD that I have squashed up to cover the last two months and I find this kind of combination works fine for me for both direction and the timing of both entries and exits.

Edited to add a closer chart of just january. The red/black ribbon gives good signals for moves in the EMA trend direction and , of course, could equally well be applied to bounces off support/resistance lines. I only show this as an example how indicators and PA can be combined and that is it not necessary to think of either one or the other.

Ema cross over can’t be followed blindly, you have to add some thing with them to trade successfully.