Forex Trading With Moving Averages

[tmbaru 10]

As a trader continues to participate in the Forex market, he masters the art of employing various tools in his trading thus becoming a better trader. As a newbie, you should have genuine interest to learn the tools that you can employ to determine the entry and exit of individual trades. Some of the tools that will be beneficial to you are Moving Averages technical indicators. These are some of the popular indicators used by technical analysts in the Forex market to find trends in the market.

 

Finding the Trend

 

A majority of trades takes place on a short basis as compared to long term. Short term trading entails limiting the time frame that your capital investment is at risk. As a trader, you have to make a decision whether you want to be bearish or bullish on a given currency pair before entering a trade. To achieve this, you need a longer term snapshot to provide for you a useful road map to get to your destination. While you can make money through short term trading, it is easier to make more substantial amount of cash by trading in the direction of a major trend than trading against it. Therefore, before you consider a trade using any of the currency pair; it is of paramount importance to objectively identify the prevailing major trend in the market.

After establishing the current major trend, you can then fine tune your entries and exits. The aim objective of doing this is to focus on short trades when the major trend is bearish and on long trades when the major trend is bullish.

 

Trend Filtering

 

One of the simplest and easiest strategies for trend filtering is applying moving average to a data set. Moving averages help a Forex trader to quickly visualize the current trend by observing whether the price action is below or above the moving average. If you use moving averages appropriately they will help you to focus on the best opportunities in the market for optimal benefits.

 

Moving average as a trend following tool is effective in generating buy and sell signals. Moving average indicator smooths out volatility of price action, this enables Forex traders to clearly establish the direction of the trend in the market. By comparing moving averages indicator with price action, a trader can establish the trend of the market as well as predict where the currency price is likely to head to next.

In an upward trend, the moving averages move in an upward direction while in a downward trend moving average tends to move in a general downward direction. When the market is moving in an upward trend, the price of the currencies is usually above the moving average. It is worth mentioning that when the price is above the moving average, then the trend will remain bullish. When the price closes below the moving average it indicates that the support that was being offered by the moving average has been broken and the upward trend has ended. On the hindsight, in a downward trend when the price closes above the moving average it shows that the support that was being offered by the technical indicator has been broken and the downward trend has come to a halt.

 

Conclusion

One of the ways to trade successfully in the Forex market is to develop the ability to spot opportunities and establishing how to take advantage of those opportunities for your advantage. Trading in the direction of the major trend in the market is one of the best ways of improving your odds of making good money in the financial market. Moving averages is just one of trend identification tools.

[SunTrader 10]

Just lines on a chart and the prime example of having a self reinforcing quality.

[BlueHorseshoe 10]

 

5) Am i right in thinking a MA is measuring the average closing price? If so,does that mean all the h/l's aren't worth bothering with..even though those are the very points at which price turns?

 

 

The highs and lows are worth bothering with if you are willing/able to trade at those prices. If you're trading end-of-day only, then their value immediately becomes less obvious, as you can only enter or exit positions at the close.

 

However . . . MAs are calculated entirely with historical prices. As you can't trade at any historical price, then the closing prices are no more tradeable than the highs and lows . . .

 

So, are we to conclude that the MA is only useful in so much as it can provide information about likely future prices?

 

If that's the case then you need to know whether the closing prices provide greater disclosure about the future closing prices than the highs/lows.

 

It all gets complicated very quickly, and heaven help the unsuspecting fool who opens the pandora's box of the 9 other questions!

 

BlueHorseshoe

[talond 10]

If I walk into a department store and look at an escalator I don't need to apply a moving average to it's steps to know if it's going up or down...