In Forex trading, moving averages are mainly used to generate trading signals. But the larger period moving averages such as 50 and Simple Moving Averages SMAs are also used to gauge potential support and resistance. When moving averages are used to generate directional movement-based signals to buy or sell a currency pair, the underlying concept is that traders believe the past price action will continue in the future and it can be profitable to follow a trend.
On the other hand, when moving averages are used to predict major support and resistance, it is based on the idea of self-fulfilling prophecy. In this moving average strategy guide, we will discuss how you can utilize and diversely apply moving averages by adapting it to different strategies. There are hundreds of online articles about how to calculate different types of moving averages and you should learn the basics of how to calculate it.
However, all charting software will calculate this for you. As we will focus on how to use a moving average based trading strategy, we will only discuss the merits of using different types of moving averages in this article. The SMA, as the name suggests, only draws lines based on the average price action. However, the interesting bit about EMAs is that it gives a higher weighting to more recent time periods.
So, if you are drawing a period moving average, the line will prioritize the last few periods or bars compared to the time periods at the beginning of the series. It can generate more false signals compared to when using SMAs. After all, a minor retracement can tilt the EMAs at a much faster rate compared to SMAs, which can send a false reversal signal. Basically, using EMAs will get you into a trade earlier, but you might get out of the trade based on a false reversal signal.
By contrast, using SMAs will get you into a trend later, but you will likely ride it longer because there will be less false signals about reversals. However, if you are following a trend, using SMAs will lag more to a change in trend and you may leave a lot of profits on the table. Hence, it makes sense that we try to develop trading strategies where the SMAs will generate an entry signal to trade and help minimize false signals, where using EMAs will generate exit signals.
Because it is more important to get it right when entering the market than leaving some profits on the table. However, to keep things simple, we will use EMAs to demonstrate how you can use moving averages in your trading strategies. Here, we will look at six of the most effective ways you can trade with moving averages. Moving Average Strategy 1: Moving Average Crossover Moving average crossover is one of the most popular trading strategies and it is popular for a good reason.
Since moving averages smooth out price action, when a lower period moving average crosses above or below another higher period moving average, it confirms that the direction of the price has changed. While you can use any moving average, be it the combination of 5 and 10, or 15 and 30, the best crosses are always based on the Fibonacci sequences such as 5, 8, 13, 21… etc.
Since professional and institutional traders often use Fibonacci numbers moving average crosses, it ends up acting as a self-fulfilling prophecy as well. Under the circumstances, whenever a shorter period MA crossover happens, here we used EMA 5 and 13 cross — both Fibonacci numbers , you can consider placing a new buy order to keep scaling into your position and ride the long-term trend. During a downturn, the price will remain below the EMA and the shorter period MA crosses will signal sell orders.
Moving Average Strategy 2: Using Moving Averages During Pullbacks Trading a trend would be much easier if there were no pullbacks and it often confuses beginner traders. However, there is a nifty way to identify if crossover in the opposite direction is a retracement or really a reversal.
For this, you need an oscillator indicator on your chart, such as the Stochastics indicator. But every time, the Stochastics turned oversold fairly quickly as it fell below the 20 level when this happened, but the EMA 5 and 13 do not fall below the previous lows, it signals a retracement and not a complete reversal of the trend. The concept used here is called a divergence.
If you find such divergence in the market, wait for the shorter period EMAs crossover to signal that the trend has resumed and then, enter the market again. This way, you can keep following the trend and scale in to maximize your profit from a single long-term trend. The advantage of swing trading, therefore, is the fact that all the minor price fluctuation in smaller timeframes which is the domain of the day trader is ignored and a larger long term view is held regarding each trade that is placed.
The advantage of swing trading, therefore, are these: trades held for days, weeks and months mean a lot more profit minor price noise is irrelevant trades are often entered at swing points, which are in most cases, present really low risk, high reward trade entry points. The advantages of day trading are these: profits or loss realized in a shorter timeframe during the day. Many more trading opportunities can be found during the day.
The disadvantages of day trading are these: small profits for each trade potential to over-trade high pressure and hectic trading environment and need to be on constant alert to scan your trading charts for setups. Scalping is also a very shorter form of day trading…it takes minutes or seconds to open can close a trade.
Click that link above to check these amazing forex swing trading strategies out. The Best Forex Brokers? My general advice is this: find forex brokers that have been established a long time ago and have a good reputation and governed by forex regulatory bodies find forex brokers that have offices in reputable countries like in UK, US, Canada, and Australia because the regulatory compliance of these countries are much better than others..
Your trading cost increases if you have a trading account with forex brokers that have huge spreads. Check them out before opening a trading account with them. Best Hours To Trade Forex? Opinions may vary but one thing is certain…its much easier to make money trading the forex market when the fx market has volatility and momentum. And so when it comes to that, many forex traders like to trade the forex market during the London Session and the New Your Session.
The London forex session is where a huge volume of forex transactions are made every day which is followed next by the New Your Session. In the Asian forex trading session, its is most often characterized by thin volumes during the day. Its best in my opinion to trade forex during the London fx hours or during the New Your forex trading session. Best Currency Pairs To Trade? Choosing a currency pair to trade is very important.
Most traders are not full-time traders because most will have day jobs while trading and this will often determine the type of trading a trader does from being a day trader to holding positions for a long time like a swing trader. For some, because the forex currency market operates 24hrs during the day, they can trade after work for a few minutes or hours each day. Your End Goal In Forex Trading What is your profit target, what is your stop loss, how are you going to manage a profitable trade?
Nothing is more frustrating than seeing a positive trade turn into negative and eventually into a loss. The price will go where it wants to go. Holy Grail Of Forex Trading? The holy grail of Forex trading is money management. Sometimes called Trading Risk Management. What blows millions of forex trading accounts is Money Management. You are at the mercy of market forces of supply and demand buyers and sellers. But what you can control is RISK. You decide how much of your account you are going to risk in a trade.
Forex Trading Software These days, when you talk about Forex trading software, it can be: forex expert advisors forex indicators forex trading platforms What are expert advisors? Expert advisors are trading systems coded so that this program can buy or sell without any human intervention. If you have a forex trading strategy with clear rules on when to buy and sell, it can be programmed into an expert advisor. Now, forex indicators, on the other hands are tools that that you often find on your trading platforms that assist you making a decision to buy or sell.
Now, when you open a demo account or a real live account with a forex broker, the software that you use to buy or sell is called the trading platform. Many forex brokers these days also provide the Metatrader4 trading platform. An MT4 platform is a software that is easy to download and in my opinion, one of the very easiest to understand and use.
You will in no time at all understand how to use the MT4 trading platform and off course, its free to use as well provided by the forex broker. Why because the human emotion is involved…greed and fear come into play. It all comes down to controlling and managing your risk. Failure of this and you will not last long in trading forex online. Can you make money trading Forex? Yes and No. This is not a surprising answer. You can definitely make money. And also you can lose a lot of money.
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On the other hand, when moving averages are used to predict major support and resistance, it is based on the idea of self-fulfilling prophecy. In this moving average strategy guide, we will discuss how you can utilize and diversely apply moving averages by adapting it to different strategies. There are hundreds of online articles about how to calculate different types of moving averages and you should learn the basics of how to calculate it. However, all charting software will calculate this for you.
As we will focus on how to use a moving average based trading strategy, we will only discuss the merits of using different types of moving averages in this article. The SMA, as the name suggests, only draws lines based on the average price action.
However, the interesting bit about EMAs is that it gives a higher weighting to more recent time periods. So, if you are drawing a period moving average, the line will prioritize the last few periods or bars compared to the time periods at the beginning of the series. It can generate more false signals compared to when using SMAs.
After all, a minor retracement can tilt the EMAs at a much faster rate compared to SMAs, which can send a false reversal signal. Basically, using EMAs will get you into a trade earlier, but you might get out of the trade based on a false reversal signal. By contrast, using SMAs will get you into a trend later, but you will likely ride it longer because there will be less false signals about reversals. However, if you are following a trend, using SMAs will lag more to a change in trend and you may leave a lot of profits on the table.
Hence, it makes sense that we try to develop trading strategies where the SMAs will generate an entry signal to trade and help minimize false signals, where using EMAs will generate exit signals. Because it is more important to get it right when entering the market than leaving some profits on the table. However, to keep things simple, we will use EMAs to demonstrate how you can use moving averages in your trading strategies. Here, we will look at six of the most effective ways you can trade with moving averages.
Moving Average Strategy 1: Moving Average Crossover Moving average crossover is one of the most popular trading strategies and it is popular for a good reason. Since moving averages smooth out price action, when a lower period moving average crosses above or below another higher period moving average, it confirms that the direction of the price has changed. While you can use any moving average, be it the combination of 5 and 10, or 15 and 30, the best crosses are always based on the Fibonacci sequences such as 5, 8, 13, 21… etc.
Since professional and institutional traders often use Fibonacci numbers moving average crosses, it ends up acting as a self-fulfilling prophecy as well. Under the circumstances, whenever a shorter period MA crossover happens, here we used EMA 5 and 13 cross — both Fibonacci numbers , you can consider placing a new buy order to keep scaling into your position and ride the long-term trend. During a downturn, the price will remain below the EMA and the shorter period MA crosses will signal sell orders.
Moving Average Strategy 2: Using Moving Averages During Pullbacks Trading a trend would be much easier if there were no pullbacks and it often confuses beginner traders. However, there is a nifty way to identify if crossover in the opposite direction is a retracement or really a reversal.
For this, you need an oscillator indicator on your chart, such as the Stochastics indicator. But every time, the Stochastics turned oversold fairly quickly as it fell below the 20 level when this happened, but the EMA 5 and 13 do not fall below the previous lows, it signals a retracement and not a complete reversal of the trend.
The concept used here is called a divergence. If you find such divergence in the market, wait for the shorter period EMAs crossover to signal that the trend has resumed and then, enter the market again. This way, you can keep following the trend and scale in to maximize your profit from a single long-term trend.
Moving Average Strategy 3: Using Moving Averages to Ride a Trend Most currency pairs remain range-bound for the majority of the time and trends only occasionally. However, getting into a trend at an early stage yield the highest reward to risk ratio trades.
Most beginner traders consider using trend lines to follow a trend. After Break and Retest, We can increase our odds if we can wait for a break below the trigger line as well. This is another great way to avoid false breakouts. This is the last way we can use the moving average in forex trading. That is to, 4.
Identify Market Condition. We can identify those market phrase easily with our eyes. But some times messy price actions makes us confused when identifying those markets phrases and the reason is Forex market is not perfect. This is why as forex traders we need to follow a systematic approach. This helps us stay consistence. This brings me to a question. How do we consistently identify market phrases?
This where the moving average in forex comes in. It helps us to identify different market phrases in a systematic approach. But how? Have a look at the bullet point below. Now Have a look at the chart below, There you have it — 4 different uses of moving average.
You have got different moving average periods period moving average, period moving average, etc and different types of moving averages such as SMA, EMA etc. But… Which is the best moving average? It depends on market conditions. You can use period moving average to catch longer trend while period exponential moving average helps you to catch quick trends.
So when thinking about a moving average strategy, first you have to decide on what kind of market condition you are going trade or what kind of move you are going catch. Assume that you aim for quick trend moves, Then period simple moving average is the best choice for you. But, Determining the trend directions is only one part of the whole trend trading strategy. Then… What else do we need to fill the other part? A high probability trade location to trade in the direction of the trend.
These two moving averages help to determine dynamic support during an uptrend. And, In a downtrend, these two moving averages work as a dynamic resistance. We already talked about this, hence we are not going to talk about this in detail. We are using Price action confirmations as an entry trigger. An uptrend, right? But not only that but the uptrend is respecting to dynamic support as well. Look at the first bounce. Now we have to look for a long opportunity, right?
Have a look at the current price. Where it right now? At the dynamic support. Now it is time to buy. This is where price action plays its role. Have a look at the bullish engulfing pattern occurred at the dynamic support. This indicates buying pressure. Now all set. We are looking to buy at the dynamic support utilizing the bullish engulfing pattern.
Now it is time to place stops and target. Have a look at the final result. Boom… Withing a few days price shoot up and hit our target. The only difference is this time we are looking at a downtrend. What is happening here? Price moving down while respecting to dynamic resistance..
The occur of the bearish engulfing pattern is significant here. Because the bearish engulfing pattern occurred at the dynamic resistance which is a higher probability area to go short. Now it is time place orders and waits.
Have a look at the final result below. Just like the previous one, price push down and hit the take profit quickly. This is how you are trading trending markets using the moving average. Next… We can also use moving averages to find trend reversals and ride the trend from the beginning. At the end of the trend, right? Which mean we should have an established trend beforehand we look for a trend reversal. Our next job is to identify reversal signs. How we can identify those reversal signals early by using moving averages?
This where moving average breakout comes in. Keep in mind that the break of the moving is just an early reversal signal, not a trade signal. You cannot buy or sell whenever moving average break above and below. Then where is the first indication? We can use chart patterns Head and Shoulders, Double Tops and Bottoms as our first trend reversal indication. Is that all? After the breakout, we can use retest of the moving average to confirm trend reversal.
This way we can avoid a false breakout. Okay, here are the steps, First, we need to find an established trend. Second, we have wait for reversal chart patterns — Head and Shoulders, Double top, etc. Then we wait for a break below the moving average.
And finally, we are looking for a retest of the moving average. According to the above, You can see that the occurrence of the double top pattern is the first trend reversal sign. Then the price broke below the moving average. This even confirms the trend reversal, right? After the breakout price starts to retest the moving average.
This is where we need to place our orders, right? Have a look at the final result of this trade.
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