Moving Averages and the Forex Market

There are a number of successful tools used to trade the Forex market, one the most popular being moving averages. Now, you may or may not use them in your trading, but they can provide a simple and valuable tool for find areas of support and resistance, as well as identifying trend direction.

If you were to place a 50 day and 20 day SMA on a chart for the past year you’ll begin to notice patterns developing. While each forex pair or index has different key averages and reactions, moving averages can really help a trader determine where buyers and sellers might be waiting.

Let’s discuss several significant things about moving averages.

• The 20 day moving average is quite often used to determine the shorter term trend, while the 50 day can determine the intermediate trend, and the 200 day is useful for showing the long-term trend.

• In markets that are trending sharply, the 5 & 10 day SMAs can provide entries and exits while your trend MAs are too far from price action

• Moving Averages allow you to see where both big and small traders are buying and selling by outlining potential areas of support and resistance.

• In the Forex market, many traders often use where price is relative to the 200 day moving average as a bull/bear indicator. Quite simply, if price is above the 200 day MA, then it’s a bull trend, if it’s below then bears are in control.

• A common indicator of a significant shift in trend is when the 50 day crosses the 200 day in either direction. When the 50 day crosses above, it’s called a Golden Cross, and when it crosses below the 200 day, it’s called a Death Cross.

• When price is in an uptrend or downtrend, the 50 day can present reliable entry points or an opportunity to add to existing positions. Typically, trend traders will wait for price to bounce off the 50 day as a support area for price.

• A breach of the 200 day moving average can be a very reliable entry & exit indicator because it signifies a huge swing in momentum.

Many traders use MAs differently, and when used correctly, such as in the methods outlined above they can become a very important tool that’s used by some of the world’s best Forex traders.

Source: Vantage FX Blog