Moving Average Strategies in Forex Trading
Moving average is one of the most popular technical analysis tool used in Forex trading. On a Forex chart, it is represented by a single line that follows the direction of price movement. It is easy to understand yet powerful enough to be used a reliable indicator of trend. It is based on past prices (that’s why it is called a lagging indicator), but gives a pretty good picture of where the prices might go in the future.
There are basically two types of moving averages: simple moving average (SMA) and exponential moving average (EMA). It suffices to say that the latter gives more emphasis to the latest data. Despite their slightly different curves, you can use either of them as it makes very little difference. So, here are some effective moving average strategies for trading.
Trend trading with 20-period MA
You may have heard the saying “Trend is your friend”. But this is true only if you know how to follow trend properly. One of the easiest ways to follow trend is to use the 20-period SMA or EMA. You can use it with any time frame, but it works better with the longer time frames.
Insert a 20-period SMA or EMA in your chart. If there is a series of candlesticks above the MA line in a generally upward direction, you can safely assume that there is an upward trend in your chosen time frame. Similarly, if there is a series of candlesticks below the MA line in a generally downward direction, then you can safely assume that there is a downtrend in your chose timeframe.
Now, as you may know, prices do not move up or down in a straight line. After every spurt of upward movement, they take a pause and may fall back to test the previous high price, which is now called the support. In the same ways, after every spurt of downward movement, they take a pause and may rise to test the previous low price, which is now called the resistance.
Wait until the candlesticks touch the 20-period moving average. In an uptrend, if the candlesticks fall towards the MA and the bounce back with or without touching it, then it is time to buy. Similarly, in a downtrend, if the candlesticks rise towards the MA and then fall back with or without touching the MA, then it is time to sell.
20-period MA crosses 50-period MA
This is a simple moving average strategy that a lot of traders use. Basically, you need to wait until the 20-period MA crosses the 50-period MA to go long (buy) or short (sell). If the 20-period MA crosses the 50-period MA from below, then it is time to buy. If the 20-period MA crosses the 50-period MA from above, then it is time to sell. This strategy can be used in all time frames. It is not a very reliable strategy, but it works often enough to give you a nice profit when there is a big movement.
Candlesticks cross the 100-period MA
The 100-period MA shows the medium term trend. Basically, what you have to do is wait until the candlesticks cross the 100-period MA. If they cross from below, then it is time to buy. If they cross from above, then it is time to sell. It can be used with all time frames, but it works better with longer time frames.
Candlesticks cross the 200-period MA
The 200-period MA shows the long term trend. Basically, what you have to do is wait until the candlesticks cross the 200-period MA. If they cross from below, then it is time to buy. If they cross from above, then it is time to sell. It can be used with all time frames, but it works better with longer time frames.
The moving average is a pretty good indicator, but because it is a lagging indicator, it can often give you wrong signals. Therefore, you should use it in combination with other indicators, such as the Relative Strength Index (RSI).
If you need help in deciding when and what to buy and sell, please visit my blog How To Do Forex. I’ve been trading Forex for the last 7 years and I know a thing or two about how the market works.