How To Use Moving Average To Trade Forex

Moving averages are one of the more than pop technical indicators that traders use in the Forex marketplace. In fact, moving averages are the just indicator I utilize as part of my trading strategy.

As popular every bit they are, one question remains at the elevation of the list for almost traders – "how practice I utilise moving averages?"

That's exactly what yous're about to acquire in this lesson. We volition cover what moving averages are as well as the various ways to apply them. Nosotros volition also discuss some of the limitations that all traders should consider earlier adopting moving averages into their trading strategy.

What is a Moving Average?

The starting time thing to note about the moving boilerplate is that information technology'due south a lagging indicator. This means that it's based on by cost action.

In that location are 2 bones types of moving averages – the simple moving average (SMA) and the exponential moving average (EMA). As the proper name implies, the simple moving average is a simple boilerplate of a currency pair'southward movement over fourth dimension. The exponential moving boilerplate on the other hand gives greater weight to more recent price activeness.

The moving averages that we will be looking at in this lesson are the x and 20 exponential moving averages. I prefer exponential over elementary as I experience it gives a improve indication of what is happening rather than what has happened.

Means to Apply Moving Averages

There are many ways in which to use moving averages, but the three methods below are my personal favorite.

One thing to proceed in mind equally we motion through the lesson, is that a moving boilerplate or moving average combination should never exist used alone. Because it is a lagging indicator, the moving average should always be used in combination with other price activity patterns and signals to help put the odds in your favor.

Trend Analysis

The use of moving averages for trend analysis is arguably the most common utilise of the indicator. There are many variations of moving averages that a trader may use to analyze a tendency, but my favorite combination is the x EMA and 20 EMA.

Like nigh things in the Forex market, using moving averages to analyze a trend isn't a perfect science. Nor is it something you want to rely on past itself. Yet when used properly, these two moving averages can make identifying a trend much easier.

Permit's await at an example.

using moving averages for trend analysis

Notice in the AUDUSD daily chart above how we are only looking for buying opportunities when the 10 EMA is on top of the 20 EMA. Because the ten EMA follows price action more than closely than the 20 EMA, when information technology's on top it's signaling that the marketplace is in an uptrend.

On the flip side, when the 10 EMA is below the 20 EMA, we only want to exist looking for selling opportunities equally this oft represents a downtrend.

Dynamic Back up and Resistance

These two moving averages can also exist used as dynamic support and resistance. There are several moving averages which bear more weight than others in the market, and the x and twenty menstruum moving averages are amidst them.

Here is a list of the v most common moving averages that Forex traders use:

Because the periods above are unremarkably used, the market tends to respect them more than others. It's the same reason that back up and resistance levels work in the marketplace – if enough traders are using the same level to buy or sell a market, then the market place is likely to react appropriately.

Let's have a await at the 10 and twenty EMA acting equally dynamic resistance during a downtrend.

nzdusd dynamic support and resistance levels

Detect how once the 10 EMA crossed under the 20 EMA, it began to act as dynamic resistance. This type of dynamic resistance combined with a cost action sell indicate can be a powerful combination.

Identifying Overextended Markets

Concluding just not least is using moving averages to help determine if a market is overextended. 1 of the more common pitfalls among Forex traders is buying or selling too late. We want to avert entering a market that has overextended itself, and moving averages can help us make up one's mind if this is the case.

What does information technology mean to be overextended you lot inquire?

Just put, all markets normalize after an extended move upwardly or down. This may come in the form of sideways price action or fifty-fifty a retracement. Past using the x and twenty EMA we tin can stay away from trying to bring together the tendency too late.

Information technology should be noted that this method goes hand in hand with using moving averages as dynamic support and resistance.

Here's an example of how to use moving averages to avoid selling an overextended market.

nzdjpy daily forex chart with moving averages

In the NZDJPY daily chart above, the market made ii extended moves downward, away from the 10 and xx EMA. As cost action traders, nosotros want to avoid entering a market that has made an extended movement abroad from our moving averages.

Instead we want to wait for the marketplace to normalize and come up dorsum to the moving averages before looking for a sell bespeak to join the trend.

Summary

I hope this lesson has given you lot some ideas virtually how to utilise moving averages. Although there are dozens of ways to apply them every bit part of your trading strategy, the three methods detailed above are my personal favorite and take served me well over the years.

Let's recap some of the more of import points from the lesson.

There are two basic types of moving averages – the simple moving average and the exponential moving average
The exponential moving boilerplate gives greater weight to more contempo toll action
Although useful, the moving average is a lagging indicator that should never be used past itself to enter a trade
Moving averages can exist used to quickly identify a trend, making it easier to know whether to await for ownership opportunities or selling opportunities
The 10, 20, l, 100 and 200 period moving averages are the almost common and tin therefore be used equally dynamic support or resistance
The 10 and xx exponential moving averages are great for identifying markets that may be overextended