Investing & Trading

Moving Average Two Lines Strategy

By Samantha Baltodano


TL;DR:

The Two Line Moving Average strategy plots two moving averages of different lengths to provide investors with trade signals based on crossover points.


What Is the Two Line Moving Average Strategy?

The Two Line Moving Average strategy, sometimes referred to as the Dual Moving Average Crossover strategy, is fairly straightforward. You start by calculating two moving averages of different lengths for a given security.


By default, the Exponential Moving Average (EMA) is used, but you can use any other moving average strategy: simple, weighted, Wilder’s, Hull.


One moving average should be short term and the other long term.


The long term moving average will be slower to catch up to trends and will have a lower variance. It will still move in the same direction as the short term moving average, but at a slower rate.


This is why you may hear the long term average referred to as the slow average and the short term average as the fast average..


Because the two moving averages are moving at different rates, this will lead to points where the values of the moving averages are equal to each other or where they cross one another. These points are called crossover points.


How do you trade with the Two Line Moving Average?


The crossover points for the two moving averages are indicators to buy or sell the security.

  • Buy when the fast moving average crosses above the slow moving average. The security is undervalued.
  • Sell when the fast moving average crosses below the slow moving average. The security is overvalued.

Summary

  • The Two Line Moving Average strategy plots two moving averages of different lengths for a given security.
  • One moving average should be short term and the other long term.
  • The short term and the long term moving averages will travel in the same direction, but at different rates. This is what leads to the points of crossover.
  • The security is considered undervalued when the fast moving average crosses above the slow moving average. This is when you buy.
  • The security is considered overvalued when the slow moving average crosses above the fast moving average. This is when you sell.


Moving Average Two Lines is just one of many strategies that Archaide automates. For a full list of strategies and studies available click here.


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