Tags: sean | hyman | Death-Crosses | Dollar | Pairs

'Death Crosses' Cast Shadow Over Dollar Pairs

By    |   Monday, 13 September 2010 08:38 AM

I remember the early days of computerized trading. It was an amazing thing to think that an institution could program a computer to place trades according to certain criteria.

What were these signals? Well, they sure weren’t analyzing corporate balance sheets or the effectiveness of management. No, instead they were looking at trends and momentum.

These computers could be given a set of rules and they could place “buy and sell programs” as they called them. In fact, some say that the crash of 1987 was partially exaggerated by them because the computers quickly detected a downtrend and so they jumped on them and shorted the market.

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These days the same thing happens but now they have fancy words for them like algorithms, etc. The good part about them is that a computer can watch and scan for far more conditions than the average human can. Computers can also usually react quicker once trends are spotted and even figure out the quickest way to route the order. This again is another advantage over a human placing the trades.

However, there are weaknesses to using computer automated programs. These days we know them for things called “flash crashes,” etc.

But for the most part, computers have taken us forward instead of backward when it comes to trading and investing.

In fact, I want to tell you about one of the most widely used institutional programs around. They are called “death crosses” and “golden crosses.”

Remember earlier I told you that computer programmers could give their computer instructions to look for certain conditions so they could ascertain if there was a trend or not and which way the direction of the trend was moving.

Well, one way they do that is to use a couple of commonly used moving averages. Moving averages are where computers track the average price of a security over time and it plots a dot on the chart. Each day it plots a new “average.”

What they do is follow the “average” price over time to see if it’s heading higher overall or if the price of the security is heading lower.

There are moving averages that track near-term trends and there are moving averages to track longer-term trends.

Some institutions have learned to use these together and look to the crossovers of these moving averages to indicate shifts in the market’s direction.

For instance, when the shorter-term moving average crosses below the longer-term moving average, they know that the trend is likely changing and the institutional computers issue “short sell” orders where they take advantage of a falling market.

As the market fall, their profits increase. When this type of moving average crossover happens, they call this a “death cross.” It gets its name because once these cross, if it doesn’t reverse fairly soon afterward there will be a market downtrend that begins.

In fact, the U.S. Dollar Index is close to forming a death-cross right now. There are some “dollar pairs” that have already done this, such as the USD/CHF (dollar vs. the Swiss franc) and the USD/ZAR (dollar vs. the South African rand) to name a couple.

On the other hand, there’s the “golden cross.” The GBP/USD (pound vs. the dollar) and AUD/USD (Aussie dollar vs. the greenback) have recently flashed these signals.

The golden cross is a bullish signal because it shows that the near-term momentum is starting to finally climb back above the downward sloping longer-term momentum. In other words, the near-term moving average crosses up above the longer-term moving average which tells these computer programs to issue buy orders.

These automated computer programs are really “trend following” programs. They note up or downward trends and trade in that direction. They don’t close the trades or reverse the trades until there is an opposing signal.

So if there was a “golden cross” to buy, then they don’t close out the buy trade or even consider going short until there is a “death cross” signal given.

Whether you learn to use these or not, I think a good “take away point” is to make sure that you have a consistent trading system in place. One that takes gives you signals consistently and isn’t subject to being fickle like “gut instincts” would be.

Have a system that gives you definable buy parameters and sell parameters. This will help to take a lot of the emotion out of trading for you.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.

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I remember the early days of computerized trading. It was an amazing thing to think that an institution could program a computer to place trades according to certain criteria. What were these signals? Well, they sure weren t analyzing corporate balance sheets or the...
Monday, 13 September 2010 08:38 AM
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