Moving Averages and How to Use Them in Forex Trading

 

Hello there, this is tradingpedia.com and this video deals with how to use moving averages in Forex trading, but not necessarily in Forex trading only. Moving averages work on any financial markets. Moving averages are trend indicators. On the MetaTrader4 platform, you can find them under the Insert/Indicators/Trend – this is the moving average indicator.

Where To Find The Moving Averages

Like any trend indicator, the moving average appears on the main chart and not on a separate window like an oscillator. This is very important because it gives you space for analysis.

There are multiple types of moving averages – under the MA method you can find them all. You can choose either a simple moving average, exponential, smoothed or linear weighted and actually there are many other types of moving averages that you can add via custom indicators on the MetaTrader4 or maybe they are being offered by other brokers on different trading platforms.

Most used are the Simple Moving Average, also called the SMA, and the Exponential Moving Average or the EMA. A quick thing to remember – the difference between the two is that EMA sits closer to the price and reduces the lag between the price and the moving average.

Features

A moving average has 14 periods as the default setting, but you can alter it at any time. It refers to the number of candlesticks used to calculate the moving average. If we change the color and use an EMA with a period of 20, this black line that follows the market.

A MA with a period of 20 on the 4h chart on the NZDUSD, implies that the indicator, before plotting the last value, considers the previous twenty candlesticks. If we zoom in, we see the MA(20) here.

The beauty of a moving average is that it divides the screen in bullish and bearish price action. It makes it easier to identify trends, the general aspect of the market. The standard interpretation is that when the price breaks above the moving average, this is a bullish break, and the bullish market continues as the price has the ability to remain there. A bearish market begins when the market moves below the moving average. Obviously, we need to filter the information as trading is not easy.

How To Use Them

One way to trade with moving averages is to use them as support and resistance levels, but that comes handier if we use more periods. Also called the mother of all moving averages, the MA(200) defines the bullish trend all the way from here, from May 2020 to August 200, in a strong, bullish move.

Moving averages, especially the big ones, offer dynamic and horizontal support and resistance. Once broken, support turns into resistance, and the other way around. The more the price has the ability to come to the moving average, the weaker the support or resistance becomes.

Another way to use moving averages is to use a faster moving average and a slower one. The MA(200) is the slowest one and it is not wise to add more periods because the line will become flatter and won’t follow the price anymore. If we add another moving average, let’s add the MA(50), with a different color, and apply it on the chart, we have two moving averages – one faster and one slower.

The intersection of these two moving averages is referred to as a golden or death cross. Golden cross forms when the fastest moving average moves above the slowest one. That is the place to go on the long side because the market changed, the bearishness seen here turned into bullishness. A golden cross is a signal to go on the long side and you should remain on the long side all the way until a death cross forms. So far there is no death cross on the NZDUSD, but you can adjust the entries and study the technique by going back in time and study historical prices.

For example, this is a death cross, and by the time the MA(50) moved below the MA(200), the market fell all the way to March. The trend started way earlier, in January with the death cross, and every time the price reached the MA(200) it offered an opportunity to add to the short side as it acted as resistance.

Remember that the more the price has the ability to reach the MA(200), the weaker the trend. This was one time; it made a new lower low and came again to the moving average. Shorting here for the second time still works, but with a question mark that the market might reverse, and a golden cross will form.

Conclusion

To sum up, trading with moving averages allows you to split the market into a bullish and bearish perspective. When the price remains above the moving average, that is a bullish market and below is a bearish market. When a faster moving average crosses above a slower one, that is a golden cross, and you will want to buy that market. The opposite is true after a death cross, you will want to sell that currency pair. Also, very important, the more the price tests the slower moving average, the weaker the trend becomes.

Thank you for being here, bye bye.