There are almost an indefinable number of ways to trade forex and every trader develops a strategy that is right for them. However, whilst there are many different charting options and tools available, moving averages is one that is frequently used by the vast majority.
Moving averages can be used regardless of what time frame you choose to trade and can help to make it easier to identify when a trend is developing. Identifying a trend may sound simple, but in reality, they aren`t always very visible, especially with currencies that have a high degree of volatility. Using the moving average smoothes away the background `noise` allowing you to more clearly see which way the market is heading.
However, using a moving average can also be deceptive and trick you into thinking a new trend is developing when the market is just reacting to a recent event. For this reason, most traders use more than one trading average, regardless of what time frame they are planning on entering.
Using moving averages from different time frames can help to identify true trends rather than mini blips and can show you whether you should be going long or short on a pair. If the trend is up, you should see the faster averages above those that are slower and vice versa for a downward trend. Moving averages can also be used to pencil in support and resistance levels, giving clues as to when to enter a trend and when to take the money and run.
There are many different types of moving averages, all of which have distinct benefits and disadvantages. The main two are the simple moving average and the exponential moving average. The former is calculated by taking an average of the closing prices for the time frame specified, a very simplistic approach that can be influenced heavily by spikes.
Exponential moving averages are a very complex calculation, which weigh recent transactions and prices more heavily than those that occurred a while ago. EMAs have more background noise, which can sometimes lead to false indications, but they provide traders with the opportunity to jump on board a trend far more quickly.
Moving averages taken over a longer period are far smoother with less background distortions. This means there are fewer false signals that can lead to a bad trade. The slope line of a moving average can also be taken as an indication of how strong the current trend is.
Because of the simplicity of the system, moving averages are often used in rules-based programs, but it is essential to use them in tandem with another type of chart to either confirm or refute the data being shown.
There are all kinds of forex signals and indicators that you can incorporate into your trading. What you opt to use will depend upon your risk strategy and your broker`s platform. However, the chances are that moving averages will form a fundamental part of your analysis, whatever else you choose to include.
