There are many reasons traders use to exit positions or to start counter trend positions. Some platforms these days are just filled with graphs and indicators that claim to offer different exit or entry triggers. Now not all of them are bad, and many traders use them just as a visual reference to quickly see what the price is doing. Rather than watching the charts or price move around they can use a simple dot, or indication on a chart to tell them when to exit. Today we will talk about one of those indications you can use on any charting platform in existence.
Its known as he moving average crossover. Traders will place a few moving averages on their charts and when one moves above or below the other it signals the end of a trend. Now, one of the most popular ones is using the 8 (or 10) period, simple moving average along with the 20 period simple moving average, but lets look closer at what is actually happening here.
So the 8 moving average is showing you the closing price of the last 8 time periods divided by 8. So if you were on a daily chart it would be adding up the closing price of the last 8 days and then dividing it by 8. The same is true for any moving average period that you select. So really what we're looking at here is an indicator that is showing you weather price is currently above or below "average". Now traders like to see when one average is moving below another average so what does this mean?
If the 8 period moving average were to move under the 20 period moving average you could understand that price has now moved under the average for the last 8 days. You would know without looking at price that prices are now trading below average for your selected time period. You would also know that the average price over the last 8 days is now lower than the average price of the last 20 days. This may be an indication of weakness to you or a signal that it is time to exit.
While indicators on charts can be a useful function, keep in mind that they are just responding to whatever price is doing. If you understand the movement of your chosen indicators then you can be a stronger, more informed trader.