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What is a Crossover Rule?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 04 November 2016
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    Conjecture Corporation
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In terms of financial matters, a crossover rule is a regulation or rule that helps an investor to determine what sort of action to take, based on the movement of a given financial instrument. Crossover rules rely on the use of technical analysis to determine both the current movement and the options that are available to the investor when it comes to determining whether to go with a long position or a short position in regard to the investment opportunity. The crossover rule is not an arbitrary recommendation that is based on tradition, but on solid economic principles that can be applied to the current market conditions.

To a great extent, the crossover rule is based on simple common sense. The rule dictates that the investor take a long look at the current status of the financial instrument in question. Assuming that the Directional Movement Index, or DMI, indicates positive movement in the future, the response of the investor is likely to be establishing a long position in order to take advantage of the projected upward movement. The actual point of establishing the long position normally occurs when the positive directional indicator or +DI has crossed over or surpassed the negative directional indicator or –DI.

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The same basic structure of the crossover rule applies if the current status of the instrument indicates a reverse trend. In this scenario, the DMI indicates a period of negative movement will commence within a projected period of time. The point at which this downturn will take place is identified by the point at which the –DI crosses over the +DI. When this is the case, the investor would do well to establish a short position in regard to the investment opportunity, gain whatever increase can be accrued before the downturn takes place, and sell the instrument just before the projected downturn is set to begin.

While many investment strategies involve a mixture of evaluating the marketplace, identifying trends that will impact the performance of investments, and using personal instincts to make decisions about investing opportunities, the crossover rule is essentially based in understanding specific movements and reacting to them in a specific manner. By doing so, the investor stands an excellent chance of maximizing the opportunities to enjoy gains while also minimizing the chances for incurring a loss.

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