Moving averages in forex trading

Posted by on Nov 5, 2012

By Fabiano Trevisiol


What are the moving averages and how to use them

 

In this lesson, you will learn how to use moving averages to identify the trend and when it is changing.

The use of moving averages will help you in your forex trading strategy operational.

What is a moving average?

A moving average is a forex indicator consisting of a line that follow the price in the latter movement by calculating the average prices for a given period. There are 2 types of moving averages, simple and exponential. The exponential moving average from greater emphasis on latest prices, the simple moving average is calculated by giving equal importance to all prices no matter how far away from the present moment. A diminutive of the exponential moving average is EMA, which comes from the initials of the manner in which it is said in English, Exponential Moving Average, while simple is SMA, Simple Moving Average.

I usually use two moving averages on my daily charts, a 21 exponential moving average periods, and a 8 EMA periods. Periods are the prices that are calculated and represented to calculate the average. Less periods are used, the more it is said that the moving average is quick, in fact we will see which will move more quickly following the price and be very close. More periods are used and it is said that the moving average is slow, in fact we will see that will be unresponsive to price, and will tend to stay away from it most of the time

There are two easy ways to use moving averages. The first is to put only one line on the chart, and observing when the price approaches or exceeds the latter. When that crosses upward or downward is an indication that the trend has changed, from bearish to bullish and vice versa. In this case, will slow the moving average (many periods) and more rarely these crossings shall take place, in this case the resulting signal, or the indication will be more reliable, thats why we use moving averages to 120, 200 or even 300 periods.

Instead, using 2 moving averages as I do, the change in trend, is indicated when the media fast, crosses the slow in one direction. Also the space between two moving averages you define dynamic resistance area, means that when the price moves in that area, will tend to be rejected, to create the shadow, wich is the top part of the candles, or at least will be a squeeze in prices, namely the price forms candles very squashed, with shadows above and below. We define the shadow of a candle, that line above and below, while the body is the thickest part. Many of you already know, but best remembered for those are new of these notions.

However, let’s see some examples of moving average applied to the chart.

moving averages crossovers

 

In the example above, we see a part where there’s indecision, the price moves from a minimum to a maximum on 2 key levels and moving averages often intersect. In a situation like this the crossing of averages is not indicative of anything and should not be taken into account. If you don’t know what are the key levels, here are the previous lesson where explains.

 

In the second part of the chart instead, starts a trend, bearish, and we see how the fast average moves away from the slow, forming the dynamic resistance of which I spoke earlier, in fact in the case shown, the price goes back up to that layer and is then rejected. While the price can exceed the dynamic resistance of the moving averages, but then he runs into key level, makes false break (explanation of false break date in the previous lesson) and then re-starts decided downward. This is the daily chart of the euro/dollar in the last period, then this lesson can also be considered a sort of mid-term technical analysis of the pair in question.

Here is an example of applying a single slow moving average, in this case a 300 periods.

very slow moving average

This period shall be 3 years euro dollar daily chart. You can see very clearly how the intersection between the price and the average is a rare 6 times in 3 years, and therefore very reliable. Doing the same on the weekly time frame, the opportunities are even more reliable.

For this lesson is all about. Good trading and good study with forex.

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