How to Use Moving Averages to Identify Trends in Forex Trading
Moving averages can be utilized by traders to see patterns in a trend, by flattening the price action, both on their own and as part of other indicators and analyses.
An excellent trend change detector is to watch the times when the lower moving average crosses over the higher one or by applying a fancy measure called the moving average ribbon.
Trend Reversal
Moving averages are a key part of many forex trading techniques, they’re used to identify trends, serve as dynamic support/resistance levels, even trend reversals.
Traders can use either exponential or simple moving averages, depending on how they compute. Simple moving averages rely on averaged closing prices over long term while exponential moving averages add extra weight to recent price which reacts faster to trend change.
Secondly, the period of the moving average can dramatically affect how effective it is: the shorter the moving average, the more susceptible it becomes to market movements; the longer the average, the smoother and less signals it offers. When trading these types of indicators, you have to consider the wider market context and if possible, confirmation from other technical indicators – false signals can be very dangerous; they have to be used as part of a risk management strategy and plan.
Bullish Crossover
Trader use moving average indicators to detect patterns. Simpler moving averages (SMA) for example may be more useful; more advanced methods such as exponential moving average (EMA) can be more laborious to implement and come with their own drawbacks.
The concept of moving averages is simple, if price goes above them, then the market is in a bullish bias and we’re in an up trend. But if it declines under one or both moving averages, then it is bearish, since that could be a first indication of a downtrend.
But it is also prone to false positives because MA is only based on historical trends and does not always account for the possibility of future trends. This is why most traders mix MAs with other technical signals to eliminate noise and get the better signals to jump in. Keep in mind that MAs represent only the price action alone and not other factors such as news or economic data.
Bearish Crossover
MAs are fundamental to trend-following trading because it is able to minimize the noise and fluctuations of the price by smoothing them out. MAs can also be used on multiple time frames to identify trends quickly, both short and long term, but remember MAs are lagging indicators so trends might have reversed long before MA reversal signals show up on your chart.
Also can use moving averages as dynamic support and resistance as when the price “bounces off” of a moving average while the uptrend continues it tends to minimize overextending trades that can result in loss.
Support and Resistance
In order to see the momentum of a trend, traders consider a few indicators. Support and resistance levels are one of these – these are points where the order flow is more buying or selling. And also, traders can access support/resistance as entries/exits on trading.
Trading pairs find them by drawing a line between the price highs and lows on a chart. Lines of resistance link peaks; lines of support link troughs; these should span at least two peaks or troughs to be of any use.
Traders also compare lines between other timeframes to confirm a trend. If the same price is happening an hour on 30-minute and 4-hour chart, it could mean it will continue.
