- How to trade with moving averages involves waiting for price to close above or below a moving average, signalling a buy or sell trade (or exit). At the same time indicating the trend direction. As well as acting as a dynamic support and resistance levels when prices bounces off the levels multiple times.
As a beginner you must learn how to trade with moving averages. It is one of the Forex Indicators that is so essential that even as a professional trader, its uses remains a valuable one.
And today we shall be talking about how to trade with moving averages in the most simplest form. No too much complexities that would confuse you.
The post is basically for beginners. It is about trading the Forex market with one of the most humble indicators out there.
Simple but effective!
I actually started out as an indicator trader. It was so easy to understand and I was already trading, days into finding out about Forex.
I was among a group of traders following the NNFX way which I still believe can help you become profitable with Forex.
But eventually I gradually gravitated towards Price Action and once I found myself there, I realized that using moving averages can really make all the difference.
So at this junction, I would advice you to start your Forex journey with indicators, because it would make it easy. But you must eventually learn how to interpret Price action because until you do, your trading will suffer for it.
1. What Are Moving Averages?
Moving averages are a popular technical indicator in forex trading and is frequently used by traders despite the fact that it is a lagging indicator, in other words they don’t predict where price is going, they are only providing data on where price has been. 1
A moving average is an indicator used to represent the average closing price of the market over a specified period of time. Traders often make use of moving averages as it can be a good indication of current market momentum.
There are basically two types of moving averages (MA). The Simple Moving Average (SMA) and The Exponential Moving Average (EMA). Both of them can get the job done, it all depends on the kind of trader you are.
Both of them share a basic similarity, in that they help in measuring trend direction over a period of time.
However, the Simple Moving Average simply calculates an average of price data, while the Exponential Moving Average applies more weight to data that is more current, following prices more closely than a corresponding Simple Moving Average.
In other words the Exponential Moving Average is generally more sensitive to price movement. It can help you identify trends earlier than an Simple Moving Averages would.
While we have the EMA and the SMA. The period you chose is another very important factor to take into consideration.
The most popular periods used by traders are the 10, 20, 50, 100 and 200 days period.
2. How To Trade With Moving Averages
How to trade with moving averages is one of the most easiest and uncomplicated skills you would learn on your Forex Journey.
The basic idea is look at how the price action interacts with the moving average and act accordingly. This is because the moving averages is used in finding the general trend of the market.
1. Using Moving Averages To Find The Trend Of The Market
Whenever price crosses above the moving average, the market is now in an Uptrend. And you are expected to place a Buy Trade.
When price closes above the 20 period moving average, it is a signal that the Market is now trending up (Uptrend).
Once knowing that the market is now in an uptrend, that fact itself becomes a signal to enter a buy trade.
In other words, it shows you the direction of the trend as well as give you an Entry Signal
And by the way you can use any period with your moving averages. I prefer to use 20 to detect Small Trends, 50 for Medium Trends and 200 for Larger Trends.
Whenever price falls below the moving average, it is a signal that the market is now in a Downtrend and the only valid trade is a Sell Entry.
With the above example it is obvious that how to trade with moving averages is as simple as ABC.
It helps you to detect the general trend and saves you the trouble of making bad trades.
This is because you should only trade in the direction of the Trend. If it is trending up, you must only BUY. If it is trending downwards, the only safe trade to make, is a Sell.
By trading with the Trend, you minimize the amount of False Signals you get.
2. Moving Averages Detects Support And Resistance Level
We already know that price action interacts with moving averages and that, the interaction gives us trend direction and trade entries.
But it also does something else. It helps us to identify support and resistance levels.
In the case of a moving average, it serves as a dynamic support and resistance level. A dynamic support and resistance happens when a moving average intersects with the current price action.
When price is trending upwards, the moving average becomes the Support Level while it becomes the Resistance Level when it is trending downwards.
It is important to note that as a dynamic moving average, it is not as powerful or strong as a horizontal and diagonal support and resistance levels.
But it works and the reason it works is that many traders use moving averages. And the most important part of that fact is that, 90% of traders use a particular few moving averages.
Which are the:
- And 200 period moving averages.
Moving Averages is therefore self fulfilling because 90% of traders are reacting to it and making their trade decisions based on the movement of the moving average.
I personally have the 20, 50 and 200 moving averages on my chart, always. And this is apart from the 7 period moving average that I use as entry, that you would always find on my chart as well.
At any given time, we have 90% of the market reacting to one of these moving averages and by so doing, as traders we give more value to that moving average.
4. Moving Averages Is Used For Exiting Trades
Another way on how to trade with moving averages is to use it as an entry and exit indicator.
From the above explanations it is already clear that price action moving above a moving average and closing above it is a clear Entry signal.
Let’s say you enter a trade when the price action crossed the moving average line and now that you are in the trade you are wondering when to exit.
If you have already reached your target profit for that trade you can easily just exit the trade. But if you want to really enjoy the trend, you should wait till price eventually crosses back below the MA.
Just the same way the MA gives you a bullish entry signal when price crosses it, it is the same way it gives you an exit signal with a downward cross.