Moving Average Crossovers are some of the most commonly used indicators for most financial markets. Despite being pretty effective, they can be used better for higher profits and loss reduction when combined with other indicators.
In this piece, we will discuss some other indicators such as the RSI, OBV, VWMA, MACD, etc. which can be combined with moving average crossovers for better results.
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Relative Strength Index (RSI)
The Relative Strength Index is the best indicator to spot overbought or oversold assets. Overbought assets are simply those assets that may have reached prices that may be over the actual value that they currently deserve. Similarly, an oversold stock is selling lower than its true value.
To use the RSI, simply look at its value between 0-100. The extreme 30s are what you need to look for. Meaning, If the value is 70+ the stock is overbought. If it’s less than 30, it’s oversold.
An overbought stock is more likely to see a correction and pullback in the near future. Similarly, an oversold stock is more likely to go bullish.
Let’s discuss how you can use these along with moving average crossovers.
Why and How to Pair RSI with Moving Averages?
We look at moving averages primarily to spot a change in trend, or identify the trend. The problem is that these breakthroughs or trend changes can be very fickle. They may not always continue the momentum that the MA indicates.
This is where combining the RSI with the MA helps better judge the situation. Whenever you spot the MA crossing over in any direction, employ the RSI to check if the stock has been overbought or oversold.
If the moving average indicates a bullish run, but the RSI says it’s overbought, wait for a confirmation. Similarly, a bearish MA indication paired with an oversold stock may mean the MA is just a false or short-term movement.
In other words, the RSI is like a second verification of whatever the moving average indicates.
Your next position should be opened based on the RSI being either <30 or >70 combined with the MA movement.
Volume indicators and how to monitor them alongside MA crossovers
Volume simply means the “number of trades” or “total interest” happening for any event. The event could be a trend change, breakthrough, correction, or anything else. More volume means more trades. More trades mean more traders have confidence in the action. This will lead to a more prolonged and continued momentum of whatever the event is.
The two-volume indicators you can use are the OBV and the VWMA.
The OBV stands for On-Balance volume. Granville, the author of “Granville’s New Key to Stock Market Profit” said the OBV is like “a spring being wound tightly”. What it means is that the OBV indicates big pushes in either direction.
The VWMA stands for “Volume Weighted Moving Average”. The VWMA serves dual purposes, it helps you understand the volume but also tells you if a stock is overbought or oversold. On a trading chart, the current price above the VWMA indicates an overbought stock while under the VWMA signals an underbought stock.
How to Use Volume Indicators Alongside Moving Averages
To use Moving averages with volume indicators, we start with monitoring the moving averages. When the price crosses the MA in any direction it signals a move. But, how strong is that move? Should you ride the momentum and open positions? To understand that, we shift our focus to OBV and VWMA. If there’s volume with the movement, it indicates it may continue. If you don’t see volume it means the MA signal is yet to be confirmed and waiting is a better choice.
What is Moving Average Convergence Divergence (MACD)?
The MACD is somewhat similar but not identical to the RSI indicator we discussed earlier. The RSI takes into account the very recent changes to indicate overbought/sold conditions. MACD on the other hand functions “relatively” and doesn’t have flat zones for these indications.
The MACD has a signal line. When the MACD line is above this signal line, it’s a sign of strength. If the MACD line is below the signal line it means the event that you’re monitoring doesn’t have enough confidence and it’s best to hold out a bit.
To use it practically, start with the Moving Average as always. When you see the MA signal any movement, check the MACD to confirm the movement.
Conclusion
Moving Average crossovers are one of the best “first signals” but they should never be used independently or exclusively. In fact, no signal or indicator should ever be used as the sole driving factor for your trade. Start with the MA but look at the volume, direction, real-life events, and much more before actually opening or closing positions.
You must combine not just the indicators discussed here but anything else that you believe is important for your trade.
Financial markets are extremely complicated and no single indicator has a 100% correct prediction rate. Nothing in this article is financial advice and always do your own research.
