What Are Moving Averages in Trading? How 2/3 and 3/5 Crossovers Signal Market Bottoms
- Mar 5
- 6 min read
Moving averages are widely used in trading, but not all moving average strategies are effective for identifying market reversals. If you're wondering what are moving averages in trading, the key lies in understanding how they function within market cycles. While many traders rely on simple or exponential moving averages for trend-following, the real power of moving averages lies in how they confirm market cycles. In particular, 2/3 and 3/5 crossover averages are key tools for identifying market bottoms and confirming trend shifts before committing to a trade.
In this article, we will break down what moving averages are in trading, how they fit into cycle analysis, and why 2/3 and 3/5 crossovers are critical for spotting market bottoms.
What Are Moving Averages in Trading? Understanding Their Role in Market Cycles
A moving average is a calculation that smooths out price data over a specific period to identify trends more clearly. Traders use moving averages to filter out short-term price fluctuations and focus on the underlying trend. However, most traders apply moving averages incorrectly by using them as lagging indicators rather than tools for cycle confirmation.
Instead of relying on standard moving averages, traders who focus on market cycles look at crossover averages, which help confirm when a market bottom is forming. The 2/3 and 3/5 crossovers are particularly effective because they track price movements in a way that aligns with momentum shifts and institutional accumulation.
Why Standard Moving Averages Fall Short
Many traders use long-term moving averages (like the 50-day or 200-day) to determine market trends. However, these are lagging indicators and often provide signals too late, after much of the move has already occurred. The problem with traditional moving averages is that they don’t account for the natural rhythm of market cycles.
Why Crossovers Matter More Than Standard MAs
Traditional moving averages confirm trends too late – By the time a 50-day or 200-day moving average confirms a reversal, much of the profit opportunity has already been missed.
Cycle-based crossover averages are faster and more precise – They react quickly to shifts in momentum, giving traders early confirmation of potential reversals.
Crossover averages align with price channels and momentum cycles – Instead of focusing on a single moving average, traders can use crossovers to confirm when buying pressure is returning to the market.
How 2/3 and 3/5 Crossovers Signal Market Bottoms
To confirm a market bottom, traders need to look for confluence between cycle lows and moving average crossovers. The 2/3 and 3/5 crossover averages help filter out false signals and identify true turning points.
How These Crossovers Work
2/3 Crossover – This is an early confirmation tool. When price moves above the 2-period moving average and crosses above the 3-period moving average, it indicates a short-term shift in momentum.
3/5 Crossover – This confirms the trend change. A successful 3/5 crossover means that the market is beginning to form a more sustained move higher, signaling that a bottom is likely in place.
Step-by-Step Process to Identify a Market Bottom Using Crossovers
Watch for a Projected Cycle Low – Use forecast charts to identify when a cycle bottom is expected.
Check the 2/3 Crossover – When price moves above the 2-period and crosses the 3-period moving average, it signals that a momentum shift is beginning.
Validate with the 3/5 Crossover – A 3/5 crossover confirms that price is stabilizing and a new uptrend may be starting.
Ensure Price Holds Above the Crossovers – If price stays above these levels after crossing, it strengthens the signal that a bottom is in place.
Confirm with Volume and Institutional Buying – Strong volume and large-scale buying activity help validate the crossover signals.
Why Confirmation is Critical Before Entering a Trade
Many traders jump into trades too early, assuming that a crossover alone is enough to confirm a market bottom. However, waiting for price to hold above the crossovers and for momentum cycles to turn upward reduces the risk of getting caught in a failed breakout.
If price fails to hold above the 2/3 and 3/5 crossovers, the market is likely still in a downtrend. Patience is key—traders should only enter once confirmation is in place.
A similar principle applies when identifying strong market reversals. The V bottom pattern, for example, often appears during sharp declines followed by rapid recoveries. However, without confirmation from cycle analysis and moving average crossovers, traders risk mistaking a short-lived bounce for a sustainable uptrend. Check our post on V Bottom Pattern in Market Cycles: Waiting for Confirmation Before Buying the Dip for more info.
Managing Risk When Trading Market Bottoms
Even with strong crossover signals, risk management remains essential. Here’s how traders can protect themselves when entering a trade after a market bottom signal:
Use a stop-loss just below the crossover averages – If price fails to hold, exit the trade to prevent losses.
Scale into positions – Instead of going all in, add to the position only as confirmation strengthens.
Monitor price channels for additional validation – If price moves above the midline of the 5-day price channel, it strengthens the bottom signal.
Common Questions About Moving Averages in Trading
How do moving averages help traders identify market bottoms?
Moving averages help traders confirm whether a market bottom is forming by identifying when momentum shifts and price stabilizes above key levels. The 2/3 and 3/5 crossover signals are particularly useful because they provide early confirmation of trend reversals before larger institutional buyers step in. Traders should always look for additional confirmation, such as higher lows and increasing volume, to ensure the bottom is valid.
Why are crossover averages better than traditional moving averages?
Traditional moving averages, such as the 50-day or 200-day, are lagging indicators that confirm trends too late, often after a significant price move has already occurred. In contrast, 2/3 and 3/5 crossovers react faster to price action, allowing traders to identify momentum shifts in real-time. These crossovers align more closely with market cycles, helping traders position themselves before the broader trend is widely recognized.
How do I know if a crossover signal is real?
A valid crossover signal requires multiple confirmations beyond just the moving average itself. First, price must hold above the crossover levels after they trigger. Second, short-term cycles must turn up on forecast charts, indicating that the market is regaining strength. Finally, rising volume and institutional buying provide further validation that the move is legitimate and not just a temporary bounce.
A real crossover signal is confirmed when price holds above the moving average, short-term cycles turn up, and volume shows strong buying activity.
Should I use crossovers alone to trade market bottoms?
No, relying solely on crossovers can lead to false signals and premature entries. Crossovers should be used in combination with cycle analysis, price channels, and volume confirmation. If price fails to hold above key levels or if cycles haven’t fully bottomed, the market may still be in a downtrend. Patience and confirmation are essential before committing to a position.
No, crossovers should be combined with cycle analysis, price channels, and volume confirmation to avoid false signals.
What is the biggest mistake traders make with moving averages?
The most common mistake is treating moving averages as predictive tools rather than confirmation tools. Many traders enter positions simply because price touches a moving average, without waiting for confirmation from cycle analysis or price action. Another major mistake is using long-term moving averages (like the 50-day or 200-day) for timing trades, which often results in delayed and less profitable entries. The key is to use faster crossover signals in conjunction with market cycles to confirm turning points.
The biggest mistake is relying on lagging indicators instead of using crossovers that align with market cycles and price action.
Resolution to the Problem
Many traders misuse moving averages, entering trades too early or relying on lagging indicators that don’t align with market cycles. The 2/3 and 3/5 crossovers provide faster, more accurate signals for identifying market bottoms—but only when properly confirmed. By using cycle analysis, traders can avoid false breakouts and enter trades with confidence.
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Conclusion
Moving averages are only effective when used correctly—and the 2/3 and 3/5 crossovers are some of the best tools for confirming market bottoms. Rather than using moving averages as generic trend indicators, traders should apply them within the context of cycle analysis and momentum shifts. By waiting for proper confirmation, traders can time entries more effectively, reduce risk, and maximize profits when a true market bottom is in place.
Author, Steve Swanson