Forex traders can take advantage of trading opportunities by creating simple trading strategies using a few moving averages and other associated indicators. Moving averages are trend indicators in the form of lines that are calculated on the price changes of assets.
Traders can confirm a trend with moving averages and also identify support and resistance levels with the trade. The main types of moving averages include; the Exponential Moving Average (EMA) and the Simple Moving Average (SMA). The EMA gives greater weight to recent price actions, while the SMA is just a simple average of a currency pair’s movement over a period of time.
How to Use Moving Averages
We don’t recommend using a moving average or moving average combination alone. Consider that it’s the lagging indicator, we recommend using them in combination with price action signals and patterns to put odds in your favor.
Dynamic Support and Resistance
You can use both the simple and exponential moving averages as dynamic support and resistance. Most MAs carry more weight than others in the market, with the 10 and 20 periods being among them. Forex traders’ most common MAs are 10, 20, 50, 100, and 200.
These periods are more respected in the market because they are commonly used than others. Hence, why support and resistance trends to work in the market because trades use the same level to either buy or sell a market, causing the market to react accordingly.
The most common use of moving average indicators is trend analysis. As a trader, there are many variations of MAs that you can use to analyze trends. We recommend 10 EMA and 20 EMA. However, always keep in mind that using moving averages to analyze trends in the Forex Market isn’t still a perfect science.
Whenever the 10 EMA is on top of the 20 EMA, look for buying opportunities because 10 EMA tends to follow price auction more closely, and when it is on top of the 20 EMA, it is signaling that the market is in an uptrend. However, when 10 EMA is below 20 EMA, only look for selling opportunities because it represents a downtrend.
Identify Overextended Markets
You can also use moving averages to determine whether a market is overextending. Buying or selling too late is one of the most common pitfalls amongst Forex traders. We recommend that you avoid entering a market if you notice that it is overextending itself. Luckily, moving averages can help you determine this.
After an extended move up or down, markets tend to normalize. This may come in the form of a retracement or sideways price action. Using 10 EMA and 20 EMA is one of the best ways to stay away from joining a trend too late. This is why this method should go hand in hand with dynamic support and resistance moving averages.
Hence, avoid entering a market that makes an extending move away from your moving averages. Instead, wait until the market normalizes and comes back to your moving averages before looking for a sell signal to join a new trend.
Common Moving Average Forex Strategy
The moving averages you use in forex trading will be determined by whether you have a long-term horizon or a short-term horizon. For long-term trading, use the 50, 100, and 200 periods MAs and for short-term horizons, use 5, 10, and 20-period moving averages.
Your time horizon and the market you want to trend with will also influence your moving average crossover combination. A longer time horizon might require you to use a crossover strategy that will combine 50 and 200 period moving averages, while the short time horizon calls for 5 and 20 period moving averages.
To yield the best strategy, you can also use both combinations. You can use the long-time horizon to help you determine a longer-term trend. This can help you only trade in the direction using signals being generated by the shorter-term strategies.
All in all, the best way you can get substantial profits from Forex Trading by developing your own strategy that is based on your trading experiences. To make your trading more effective, make a point of learning about other indicators, and try using them.