Moving averages are useful in forex trading but you need to know how to use them correctly.
If you do they are useful for buying into existing trends, but they should never be used in isolation.
Lets see how to use them correctly.
There purpose
Moving averages come in various forms, but they all have the same aim:
To help traders identify trends smoothing out the day-to-day price fluctuations and show the average price over a set period time.
The closing price is simply added up and divided by the period of the moving average.
Popular moving averages
200 Day moving averages are popular for tracking longer trends
20 to 60 Day moving averages are useful for intermediate trends
5 to 20 Days are popular for short cycles.
Which average should you use and when?
They should never be used to identify new trends and never use moving averages in short time periods i.e under two weeks.
A Lagging not a leading indicator
There a lagging indictor in terms of price action NOT a leading indicator.
You should NOT use them to identify new trends does not mean they are not useful.
They are good as a filter for entering existing trends that are moving strongly.
A simple way to use moving averages
For example, a set up we like in a lot of markets is when a trend kicks off the 40 day moving average we view as a line that if broken the trend could be in danger.
We then look for pops back to the 18 day moving average to consider entering trades in the direction of the existing trend.
Moving averages should never be used by themselves.
They should be combined with other indicators i.e. support and resistance or a momentum indicator such as the stochastic.
They can be a very useful tool for entering an existing trend in motion and a warning sign when a trend is ending.
They still have a use
Moving averages are not as popular as they once were - I can remember the 1970s and you could simply trade using moving averages.
Trends in currencies and commodities then, were not subject to the volatility they are today, so they cant be used in this way.
However, as a backup tool for identifying and entering strong trends they can still make a valuable contribution to your trading plan.
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