By Russell Glaser – Spot crude oil prices have jumped 5% last week and in turn have triggered a buy signal on the daily chart.
Following last week’s sharp appreciation in the price of spot crud oil, the dual cross over method is forming a buy signal. However, traders will want to wait to enter the long until a confirmation of the buy signal is displayed.
Using a 5-day simple moving average (Red Line) and a 20-day simple moving average (Black Line), a buy signal is confirmed when the fast moving line crosses above the slow moving line. The daily chart below shows a buy signal forming but has yet to give a confirmation by making the breach higher. Accordingly, a sell signal would be triggered following the fast line falling below the slow line.
This trade can also stay open until a sell signal is given, allowing the trade to catch a major part of the trend.
Traders can see that this method can be successful, but the trading system does have its flaws. This cross over method works particularly well in a trending environment. Such is the case following the sell signal triggered in April.
But when the market is consolidating in a range trading environment, the results can under perform. Notice the buy signal that was triggered in the end of May. The long position would have been closed out in the first week of June for a loss.
One way to combat this is with proper risk management. A tactic used to shield a trader from losses can be to move the stop loss to breakeven following a paper profit equal to the Average True Range. Another strategy may be to trade using multiple lots. This way a trader can take profits on one lot, move the stop loss to break even, and let the other positions run until a sell signal is triggered.
Forex Market Analysis provided by Forex Yard.
© 2006 by FxYard Ltd
Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.
