In this article we will go through the best moving average strategies in Forex. Many trading platforms place an oscillator at the bottom of a chart, in a separate window. This is the visual difference between a trend indicator and an oscillator. Moving averages are, like the name suggests, an average of previous prices. Depending on the period considered, they move faster if they consider a shorter period, like ten or twenty candles. Traders love moving averages because they have a tremendous visual impact on the state of the market.
They can buy or sell in bullish or bearish markets thanks to moving averages. Moving averages lag current prices. At any one moment, there are two values plotted on the screen:. The value of moving averages is different than the actual price. Traders can use many types of moving averages. For example, consider the daily time frame of any currency pair.
The MetaTrader 4 platform allows you to pick the type of the moving average by selecting it from the pop-up window that appears. The image below shows the four options for moving averages, but they are not all. Different platforms have different options. When the price is below the moving average, the market is bearish. The same logic defines a bullish market when the price is above the moving average.
While this sounds simple, keep in mind that in Forex trading simple things work best. The formula to calculate a moving average is simplistic. This can differ, depending on the moving averages type used. To give a simple example, the exponential moving average EMA is giving more importance to the current price levels, rather than the closing price of the candles that make the period.
It applies to various other prices, like opening ones, average ones during the day, and so on. The closing prices method is the most popular one and widely used.
I described the simple moving average SMA earlier. It averages the closing prices for the candles in the period considered. As the name suggests, it is a simplistic approach to finding the state of the market, but a reliable one. It reduces the lag by applying more weight to recent prices. For this reason, it is more accurate than the SMA.
The two moving averages are the base for many other technical indicators. Bollinger Bands is one of them. The volume reflects supply and demand imbalances. The retail size of the Forex market is small. To put this in perspective, consider that Forex trading is a 5. The volume is critical in knowing when market participants, other than retail traders commercial banks, central banks, Forex brokers, liquidity providers, etc.
It acts as an indicator that shows the real direction the market is heading. The volume is irrelevant in Forex trading. Any volume indicator offered by a Forex broker shows only the volume traded at that broker.
While it offers an educated guess, it is just a guess and not a certainty. This is a relatively new concept in technical analysis. Let me explain why. Then we see the price reacting from lower in a bullish trend or higher in a bearish trend levels. The result is fascinating. The blue line is the SMA 50 , or the day simple moving average. The red line is the DMA In this case, ten periods represent ten days. How much to shift backward or forward? What is the right period to use? Moving averages have different meanings for different markets because not all markets are the same.
Financial products move differently based on the factors that influence them. Consider the Forex and the stock market. They move in a correlated fashion only when shifts in the monetary policy affect them both. Golden and death crosses matter the stock market, but not really for the Forex market.
When the small moving average crosses the bigger one in a bullish direction, traders look to buy any dip. A death cross is the opposite of a golden cross. It shows bearishness, as defined by the smaller moving average crossing below the bigger one. It shows the changes in prices of the thirty companies that make the index. Not all companies have the same weight.
Some weight more than others, but the DJIA shows the median or the average result when plotting a value on a chart. Especially relevant is the period the moving average considers. As a rule of thumb, the bigger the period, the stronger the support and resistance level is.
Hence, many traders simply sell a spike into SMA for the simple reason that rejection might appear. In this case traders expect price hesitation. It eliminates most of the lag and is more accurate. Hence, it is the favored choice among traders.
The setup is simple: A perfect order for the moving averages implies a strong trend. If it follows a golden cross the day moving average crossing above the day moving one , the trend is bullish, and traders will look to buy dips. The little the lag, the more powerful the setup. Hence, traders prefer exponential moving averages as they reduce the lag.
All eyes were on the golden cross and the perfect order to be in place. This example contains four exponential moving averages: EMA , , 50 and It goes without saying that the closest one to the price is the lowest MA. Therefore, traders look to buy dips. Also, the bigger the EMA, the stronger the support level. This way the volume traded may be different, bigger volumes being favored when the price is reaching the higher moving averages.
The example above shows four distinct situations where the EMA 50 acted as a strong support level. To spot a trend reversal, all eyes should be on the lowest EMA. In our case, the EMA When it is crossing below the EMA 50 , it shows the general trend is starting to weaken, so bulls should protect profits.
Trailing stop orders, placing pending protective orders, such crosses lead to different money management techniques. First, one should wait for either a golden or a death cross to form.
Second, the RSI shows overbought and oversold levels. The opposite is true as well: It is a great way to use the oversold areas with the RSI as the moving averages are pointing to a general bullish trend.
By the time RSI gives the entry, a nice long trade is placed with a high-probability to be a profitable one. To sum up, moving averages are powerful trend indicators. Out of all the moving averages presented here, one stands out of the crowd: Depending on the strategy used, they may have an important role in the decision-making process.
A disciplined approach to trading results in a good strategy. However, one should not rely only on technical analysis when trading the Forex market. The Super Smoother is not an actual moving average. However, the Super Smoother is designed to remove Aliasing Noise. This means that the SS in many cases will have less lag than the other Moving Averages. The webinar is usually part of a paid subscription, but this time, you have the opportunity to get it cost-less. Just add your details below and you will be able to see the webinar for FREE.
The lecture will also give you a hint how to modify the code of you Super Smoother for better results. Trading is a game of probabilities. If traders understand that there is no holy grail to Forex trading, then they are on the right track.More...