Basics of using moving averages in Forex trading strategies
MA is one of the simplest trend-following indicators, but with the help of various settings you can make it more accurate and expand its functionality. This indicator is used to determine the beginning of a trend, track its development and predict, with a significant probability, when a trend reversal may occur.
There are many ways to apply MA to chart analysis. The length MA depends on the purpose of the analysis. Short MA (5-20 periods) are best for short trends. Medium-term traders prefer to use longer MA – 20-60 periods. Long-term use MA length of 100 or more periods.
The most popular long-term MA, perhaps, 200-day. 50-day MA is popular for medium trends. Many Forex traders use both of these MAS at the same time. In the past, due to the simplicity of calculations, ten-day MA was popular: it was enough to add all the numbers and move the decimal point.
Easy application of moving average
Trend detection using a simple moving average
We can determine the main trend by comparing the current price of any currency pair with its MA, as shown in the chart.
If the current price is higher than MA, the trend is bullish, upward, and if lower – bearish. Whenever the price of a currency pair crosses the MA line, the trend changes its direction. At the intersection level you can enter the market to make a profit by putting on trend. When the candles cross the MA line from the bottom up, the trend is replaced by an upward trend, and the price of the currency pair continues to grow.
Using the moving average to determine support and resistance levels
MA can also act as a “support” or “resistance”, especially over long periods of time. Support is a price level below the current price at which demand is strong enough to prevent the price from falling further. Resistance levels, on the other hand, are price levels above the current price at which the supply volume is large enough to prevent further price growth. On the levels of resistance and support levels can be said when a certain price of the currency is repeated at a certain price level.
Having determined the trend with the help of MA, we must understand which period is better to use. The answer is simple: there are no rules in this regard, and you need to choose a period based on your own judgments. Each MA should be checked for irrelevant data and subjected to observations to see if it helps identify the trend. The shorter the period, the steeper the “slope”, and the longer the period, the more gentle it is.
MA with a short period can be used to:
- determine trend direction,
- determine whether the trend continues or reverses based on support and resistance levels.
A moving average with a longer period suggests a different approach for predicting prices:
- if the slope is flat, MA is more effective as support and resistance levels
- the same principle can be applied to determine the direction of the trend, but trading activity can be limited by the lack of opportunities for entry points
When checking the key MA level, the price may push off this level or even break it. Knowing this price will help to react and place orders.
Using two MA simultaneously to determine the trend
We have studied the use of a single MA both in a short trend and in a long trend. Let us now consider the use of two Mas simultaneously. Trend detection is important, but sometimes it’s not enough to rely on just one MA. Sometimes it is better to use several MA at the same time to confirm the direction of the market. When we use two MA with different periods, we often get a clearer picture of the trend than when we rely on a single MA.
Place any two MA, short and long, on the chart. When the short MA crosses the long MA from below, it will mean that both MA confirmed the bullish trend and buy time. If a short MA crosses a long MA from above, the trend is bearish, and this is a sell signal.
The use of MA with a shorter period allows to determine the trend at earlier stages, but with less accuracy.
When using MA with a long period, you get a later, but more accurate trend detection.
For a deeper analysis of the currency pair, you can use more MA at the same time, but be careful, as too much MA can be misleading. The use of 2 to 4 MA is sufficient for the efficient operation of the trading system.
The importance of timeframes when using MA
Traders use certain time frames (short, medium or long) depending on their style. For different timeframes and different currency pairs different MA are assumed. Place a few MA on the chart and see if you see any pattern. If you see a MA from which the price is constantly repelled, then apparently you have found a key MA that can become part of a profitable trading system.
MA are trend-following or lagging indicators, and they will always be late. You can’t say it’s bad. In any case, the trend is your friend, and in this sense it is better to trade in the direction of the market. MA gives the trader confidence that he is following the trend.
Note that in the period of price fluctuations MA are ineffective. But when there is a trend in the market, MA will help you to follow it, although they will give lagging signals. Don’t expect to sell on top and buy on bottom using only MA. Like most Forex technical analysis tools, MA can be combined with other tools to develop more accurate strategies and obtain clearer signals.