Forex moving average tips

What is average moving average? A moving average is the average value of price action data compiled over a specific moving of time. Usually the moving average comes in the form of indicators which are used to work out the trend of an asset.

In other words, moving averages can be used to check of the price action of a currency pair will move up or down.

If you check your MT4 platform on Forex4youit will be clearly seen that the moving average is classified among the TREND indicators.

Moving averages allow the trader some flexibility because it is possible to use them to choose which data points and time periods to construct them with. For instance, you can choose to use the open, high, low, close or midpoint of a trading range and then study that moving average over a time period, ranging from tick data forex monthly price data or longer.

There are several types of moving averages. However, the most common types of moving averages listed on retail forex platforms are the simple, exponential, weighted and smooth moving averages. These moving the ones that we shall focus on for the purposes of average article. The snapshot above shows how to plot three moving averages on an hourly chart for EURJPY. The three moving averages are period weighted moving average, a period exponential moving average, and a period simple moving average.

These moving averages are represented average the blue, red and gold-coloured lines respectively. The three moving averages usually carry different weights according to what data they are usually based on. This will have forex bearing on what moving averages the trader will use when considering a trade decision. Without going into a long discussion of the math behind these moving averages, The exponential moving average and the weighted moving average tend to put more emphasis on the most recent data while the simple moving average puts equal emphasis on historical and recent data.

For trading purposes, we have found that the simple moving average produces the best signals due to its balance in the use of historical and recent data. Many of the strategies we have discussed here have been based on the simple moving averages. The examples to be used in this article will therefore place maximum focus on the period simple moving average. Most trading signals that are based on the moving average are not based on the use of one single time period.

Rather it makes more sense to combine two or even three moving averages of different time periods. This is usually done for filtering and confirmation. With this in mind, let us look at some moving average strategies that make use of multiple time period moving averages. This gives us a clue as to the entire essence of the system being discussed. When creating a trading system using moving averages, the use of a dual moving average crossover approach, as depicted in the snapshot below, is usually a good starting point.

In this depiction, we use a 5-period simple moving average and a period simple moving average. They are depicted with a thin blue line and a thick black line respectively. In this example, we see that the 5-period moving average has crossed the period moving average multiple times, but there are key times when the crossover has been accompanied by a rallying trend and a falling trend at the beginning and end of the time frame in the chart. The periods of crossover are indicated by the red arrows to the downside and green arrows to the upside.

These red arrows tell us that the 5-period simple moving average crossed below the period simple moving average, and the green arrow shows that the 5-period simple moving has crossed average period simple moving average to the upside. Looking at the same chart again but with some forex on the circled area, we can see that the signals produced by the dual crossover simple moving average system can tips some problems, which in this case is delivering signals when in fact, the market will end up going nowhere because of its range-bound status at that particular moment.

So before you see that crossover and think to yourself that a chance has come to make tons of money, think again. Not only do these range-bound situations occur to ruin the party, but you moving need to realize that the moving averages have one major drawback: In order to prevent such occurrences from ruining your trade when using a dual simple moving average crossover system, there are some approaches you can deploy.

These are as follows:. You may chose to select a time period from a few years back to confirm that the results you have obtained is something which is evergreen and tips be used with confidence in a few months or even years. This step is extremely important. In science, it is not unusual to conduct Double-Blind studies. This is what this step seeks to mimic. In forex can call it Out-of-Sample Data testing. This is the only way to determine if the results of your optimizations can stand the test of time as a viable mechanical trading system.

You do not want to get results which will only last a few weeks and then become useless forever. The dual moving average crossover system has a number of drawbacks, chief of which is the propensity of the system to suffer whipsaws. That is why there is a need to come up with a system to counter this. One way to overcome whipsaws or false signals generated with a dual moving average crossover system is by deploying a moving average price channel system. This will involve the use of the moving average indicator set with a periodicity of 20, and separately applied to the high and also to the low of price.

The moving average used in this case is a period simple moving average of the price high, which is the higher black line in the snapshot below, as well as the the period simple moving average of the price low, which is the lower black line.

The moving average price channel is the space in between the two black lines, while the blue line is a 5-period simple moving average of the closing price.

The buy and sell signals shown on the snapshot are marked with the corresponding arrows: A buy signal is seen when the 5-period simple moving average of the close, or the blue line, crosses above the upper boundary line of the moving average forex channel. A sell signal is generated when the blue line crosses below the lower line, represented by the period simple moving average of the low.

We can see that the use of a price channel will drastically reduce the number of whipsaws that are seen with the dual moving average crossover system because it creates a much tighter filter for setups that the currency pair s must pass through. By creating more significant hurdles for the price action to overcome prior to the generation of a trade signal, fewer signals are generated, but these signals are much more accurate.

It is usually better to have more accurate signals which are fewer in number, than to have so many signals generated, but with a large percentage of false signals that would lead to losses on trades. If a choice is to be made between a dual moving average crossover system and the moving average price channel system, the odds would favor the price channel system because of its superiority in detecting areas of support and resistance, from where trend reversals tips expected to occur.

It is important to remember that currency pairs do not behave in the same manner. Therefore what may work very well for the EURUSD may not necessarily work for the EURJPY. This must be kept in mind when creating a mechanical trading system using any of the moving average setups described above.

There are no magic bullets, and it is best to test and optimize settings for each setup on all the currency pairs that you are interested in trading. To achieve even more superior results, the trader can decide to use a combination strategy, in which the moving average crossover and moving average price channel techniques are combined. This strategy is demonstrated in the snapshot below:. The price channel system is shown on a one hour chart of AUDJPY. The green arrows identify when the blue line crosses the period moving average of the higher line, which is a period simple moving average of the price high.

The red arrows indicate a cross below the period simple moving average of the price low. The diamonds indicate when the 5-period moving average crossed below the period. The essential element of the strategy is to combine the best of the two moving average systems which have been described above tips one. The moving purpose is to get the best of the two worlds.

With so many time periods to choose from, which settings are considered the gold standard when using moving averages for forex trading? One of the most popular dual crossover moving average settings used the world over is the combination of the period simple moving average of the close and a period average moving average of the close. This setting works best on the daily chart because of the length of the time period used in setting the moving averages.

The snapshot above is the moving chart of the USDCAD, and tips an example of when the period moving average provided support, while the period moving average provided resistance circled on the blue line. However, the settings work best for stocks and less so for currencies. The strategy below shows such a cross over system using a week and a week simple moving average of the close on a currency chart, with the support and resistance for the trades provided by the SMA.

How does this work? We will be looking for long forex when price is above the SMA, looking for a bounce on this SMA when the cross of the average above the 26SMA has occurred.

The color-coded MACD can be used as a confirmation for the trade. We shall be using the daily time frame for this trade. This means that a trader must pay attention to risk management as stops used will be equivalent to the intraday range of some of the currencies up to pips or more. It therefore means that traders using this strategy should be a bit more patient as the trade will take days to fully play out.

Any currency pair can be used to trade this strategy. The Stop Loss for the long entry should be set to around 10 — 15 pips below the entry candlestick. In order to take profit for this trade, the profit target can be located under the following conditions:.

Look at this chart for the AUDJPY. This is forex daily chart which combines the scenarios for long and short order setups. A short entry setup is seen there is a corresponding cross of the 13SMA over the 26SMA to the downside at the same time that the MACD histogram is red in color and the price is being resisted off the Tips.

The trader can then take the short position as shown by the red circled area, and take profit as follows:. The long entry setup is shown by a cross of the 13SMA moving the 26SMA to the upside, at the same time that the MACD histogram has turned blue, and price is bouncing off the SMA.

Profit targets can be set at the same time that the reverse cross of the 13SMA on the 26SMA occurs, or at the price resistance. Dankra is a forex trader who has played the markets for 7 average. He also trades binary options and spends his free time developing strategies that traders can use to beat the markets.

He also codes indicators and EAs for the MT4 platform. Home Average Analysis Technical Analysis Fundamental Analysis Forex Research Fractal Analysis. Featured October 2, November 30, Charts and Patterns Forex Indicators Trading Methods Trading Strategies.

Featured November moving, August 5, BST 0 New tricks for an old indicator — does RSI 21 work? July 9, June 25, BST 0 Trading Multiple Touch Levels. Forex Tips Forex Walkthrough. Featured July 17,8: July 7, BST 0 Sentiment Analysis in Forex. July 4,8: BST 0 More About Profit Targets. June 30,8: BST 0 Guidelines for Using the Economic Calendar. By Dankra on July 18,7: These are as follows: First, select the currency pair you are interested in trading, as well as the time frame you want to tips. This could be for instance, EURUSD on a daily chart.

The second is to select a time period without a trend bias. This is done by ensuring that the time period to be tested contains both a trending section and a non-trending section. Eliminating trend bias helps you get accurate results in your testing.

Conduct an optimization to identify which moving average parameters are the best to use. Once you have completed these steps, examine a totally different period of time to see if the results you have obtained can be replicated.

This strategy is demonstrated in the snapshot below: When the 13SMA crosses above the 26SMA to the upside. Price is above SMA, or ideally, bounces off it. The color-coded MACD is blue in color. In order to take profit for this trade, the profit target can be located under the following conditions: Short Entry A short entry setup is seen there is a corresponding cross of the 13SMA over the 26SMA to the downside at the same time that the MACD histogram is red in color and the price is being resisted off the SMA.

Forex trader can then take the short position as shown by the red circled area, and take profit as follows: Long Entry Forex long entry setup is shown by a cross of the 13SMA over the 26SMA to the upside, at the moving time that the Tips histogram has turned blue, and price is bouncing off the SMA.

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