Crossover

What is 'Crossover'

A crossover is the point on a stock chart when a security and an indicator intersect. Technical analysts use crossovers to aid in forecasting the future movements in the price of a stock.

In most technical analysis models, a crossover is a signal to either buy or sell. On the chart below, the stock falls below its 20-day moving average – a bearish sign.

Crossover

BREAKING DOWN 'Crossover'

An example of a crossover would be when the security line breaks through its 25-day moving average, which may be a signal to buy the stock. Some of the indicators that use crossovers are moving averages and Bollinger Bands.

Technical analysis utilizes crossovers to indicate general buy or sell signals on the underlying financial instruments. Traders use crossovers with various technical indicators to track turning points in price trends, momentum, volatility, money flow and sentiment. Moving average crossovers trigger breakouts and breakdowns.

Moving Average Crossovers

When utilizing moving averages, crossovers can determine a change in the price trend. A common trend reversal technique is utilizing a five-period simple moving average with a 15-period simple moving average. When the five-period moving average forms a crossover through the 15-period moving average, it signals a reversal in the trend and potentially the start of a new opposite trend, which is called a breakout or a breakdown.

A five-period moving average crossing up through the 15-period moving average indicates a price breakout that should form an uptrend, composed of higher highs and higher lows. A five-period moving average crossover down through the 15-period moving averages signals a price breakdown that should start a new downtrend, composed of lower highs and lower lows.

The rule of thumb is that longer time frame periods result in stronger lasting signals. A daily chart time period is stronger than a one-minute chart time period. The trade-off is that the shorter time period crossovers give earlier signals, but have many more false signals. When the daily 50-period moving average makes a crossover through the daily 200-period moving average, this is often known as the death cross, which signals a major price trend reversal.

Stochastic Crossovers

The stochastic indicator measures the momentum of an underlying financial instrument. It gauges the immediate overbought or oversold condition of the instrument, similar to a car tachometer.

The stochastic indicator is composed of two oscillators; the %D stochastic is the lead while the %d-slow is the laggard on a chart labelled from 0 to 100 bands.

When the stochastic moves above the 80 band, the stock (or whatever financial instrument) is considered to be overbought. When the stochastic falls below the 20 band, the underlying is considered oversold. A sell signal forms when the %D stochastic forms a crossover down through the %D-slow under the 80 band. A buy signal triggers when the %D forms a crossover through the %D-slow back up through the 20 band.

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