Moving Averages Defined
Moving averages regardless of the time frame used all have the same purpose:
They identify trends over specific periods of time and smooth out the day-to-day price fluctuations, that are a caused by short term volatility. The fact is prices will always spike away from the main trend due to the emotions of greed and fear. After human emotion has subsided prices will normally return to the average.
Moving Averages Calculation
The calculation for any moving average is the same:
The closing price is added up and divided by the time period of the moving average to create an average price for the whole period
Moving Average What Time Periods are Best?
200 Day moving averages are popular for tracking longer term trends and 20, 40 and 60 Day moving averages for tracking the intermediate trend.
Shorter Periods are used and many Forex traders but using moving averages within a day is of no use at all, because price volatility within any period less than a day is totally random. We would only use daily moving averages over 9 days and the most popular 3 we look at are over 18 days or more.
We like the following periods:
18 Day MA
In any strong up trend or down trend, buying or selling back to the 18 day MA can be very effective and allows you to get in on the existing trend with the best risk to reward. If you look at any Forex chart, you will see how effective this average is in terms of getting into the prevailing trend.
40 Day MA
We like to use this as a trailing stop in long term trend following and if this level is violated then the existing trend is in trouble
200 Day MA
This is another effective long term MA which can be used to spot the really big trend changes
Moving averages give you areas of value; that's all and your Forex trading system needs to prove these levels hold before you execute your trade.
Moving Averages Need to Be Used with Other Indicators
short term price spikes which move away from a longer term moving average will tend to return to it after becoming overbought or oversold, this makes them a great tool for spotting value areas in currencies and isolating areas where you can take a trading signal – but you should not use them by themselves to generate trading signals. You need to confirm any entry into the market and for doing this, you should use some momentum oscillators to prove the level has held - then only after you have confirmation of this, should you execute your trading signal.
A Simple and Effective Tool for Profit
Moving averages maybe a simple tool but the logic is easy to understand and timeless and if you use the right moving averages and combine them with other FX trading indicators, you can enhance the profit potential of your currency trading strategy.