Make everything as simple as possible, but not simpler. Moving averages take a fixed set of data and give you an average price. If the average is moving higher, price is in an uptrend on at least one or possibly multiple time-frames. Moving averages are simple to use and can be effective in recognizing trending, ranging, or corrective environments so that you can be better positioned for the next move.
Often traders will use more than one moving average because two moving averages can be treated as a trend trigger. In other words, when the shorter moving average crosses above the slower moving average, like in the finger trap strategy, a buy signal is generated until the moving averages reverse or you hit your profit target. One word of warning: The moving averages I often use are the 8, 21, 55 for trade triggers and a or for a clean trend filter.
Moving Averages are often the first indicator that new traders are introduced to and for good reason. It helps you to define the trend and potential entries in the direction of the trend. Moving averages can be a simple tool to define support and resistance in the FX Market. When a market is in a strong trend, any bounce off a moving average, like the first bounce off the dma in the GBPUSD chart above, can present a significant opportunity to join the trend until price closes below the dma.
There are many uses for moving averages but a simple system is to look for a moving average cross over. The moving average crossover looks for the short or faster moving average to cross above an already rising longer or slow moving average as a buy signal. When looking to sell a currency pair, you can look for the short or faster moving average to cross below a falling longer or slow moving average as a sell signal.
If you can get comfortable with a specific set of moving averages, you can objectively analyze and trade the FX market week in and week out. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Click here to dismiss. Foundations of Technical Analysis: Classic Chart Patterns, Part I.
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