If you are new to forex trading, all the charts and technical indicators can seem overwhelming. However, the good news is that you don’t need to use advanced trading strategies or complex technical indicators in order to make money in the forex market. By using a few easy-to-understand indicators and simple strategies, it is still possible to make winning trades that will net you a positive return on your investment. Moving averages are one of the most popular easy-to-understand indicators. The following are the different ways in which you can use them to your advantage.
Use moving averages to determine the overall direction of a trend
If you have different trading strategies for trending markets, it is always good to have an indicator that tells you when it is the right time to deploy a certain strategy. Moving averages come in handy in helping you to know whether a given price is trending upwards or downwards. This is so mainly because a moving average is simply the average of the price over a specific period, and so if the average is rising, it typically implies that the market is trending upwards. On the other hand, if the average is falling, it usually implies that the market is trending downwards. As a result, it can come in handy in helping to cut through the noise of short term price fluctuations, something that will maximize your odds of making the right trades.
Use moving averages to determine the perfect entries for trades
To make the most of moving averages as technical indicators, it is always advisable to use at least two averages. One should be a long-term moving average, like a 200-day moving average, and the other should be a short-term moving average, like a 15-day moving average.
In a trending market, you will have a good chance of making a profit by entering a position as soon as the short-term moving average goes above the long-term moving average. This is because this is an indication of a market that is trending upwards, and entering the market at this point will increase your odds of making a profit as the price is likely to keep on increasing.
Use moving averages to determine the perfect exits for trades
On the other hand, if the short term average starts moving below the long-term moving average, then it is time to exit the long trading position that you have taken. This is so mainly because this is usually an indication of the fact that the price will likely continue to fall and maintaining that position will therefore lead you to losing any gains you had achieved on the trade.
Use moving averages to create stop losses and other types of orders
Orders like stop losses come in handy when it comes to minimizing risk and increasing the odds of making a healthy return on investments. They do so especially because they help traders to stick to their trading plans. They minimize the chances of emotional trading since such orders execute automatically and as such can protect against greed, fear or revenge trading
Since moving averages are great indicators of when it is time to get out of a given position, you can use them as the baseline of when to create a stop loss order in order to stop yourself from losing all the profit that you made on a given trade. This will simplify the trading process for you, especially if you are a newbie, while also shielding you from undertaking more risk than your portfolio can handle.
Use moving averages to identify support and resistance levels
Generally, the more informed a trader is, the higher the chances that he or she will make winning trades. Figuring out the resistance and support levels of a given price is information that most traders find invaluable. This is so mainly because these levels add a certain degree of predictability as far as the market is concerned in that one can easily gain a certain level of certainty that the price will not fall beyond a given point or it will not rise above a given price point. Since moving averages can come in handy in helping to identify either support or resistance levels, they can help to simplify your decision making process especially when it comes to when to enter or exit certain positions.