Many traders use moving averages in forex trading to analyze trends, support and resistance levels, and entry and exit points. While simple and exponential moving averages are commonly used, understanding the different types of moving averages and their variations can help traders create more effective trading strategies. Combining moving averages with momentum indicators, crosses of moving averages, and deviation from moving averages can produce successful results.
Types of Moving Averages: Moving averages come in various forms, including simple moving averages (SMAs), exponential moving averages (EMAs), and linear weighted moving averages (LWMAs or WMAs). They can be applied to closing or starting prices, with closing prices often carrying more weight.
Valuable Moving Averages: Some valuable moving averages that traders often focus on include the 20 EMA, 50 SMA, 100 SMA, and 200 SMA. However, it’s important not to rely too heavily on these averages alone and to combine them with other indicators for more effective trading.
Momentum indicators using moving averages
Combining moving averages with momentum indicators can help traders identify trends and their strengths. Looking at the slope of a moving average’s angle can indicate a strong trend, while crosses of moving averages on different time frames can provide entry points. Using multiple moving averages and time frames can also be successful.
One method for doing this is looking at the slope of a moving average’s angle. For instance, many traders may notice the 20 EMA’s angle during a robust, rising trend. A trend may be seen if the angle is significant and persistent. Observe how the 20 EMA displays a relatively strong angle in the chart below, as well as how the price has remained chiefly below it during the whole history of the chart. This suggests that the trend is declining.
Crosses of the Moving Average as Momentum Indicators
Looking at whether a quicker moving average is higher than a slower moving average and applying this to different time frames are more advanced ways to do this. When the moving averages cross back in the same direction as the higher time frame or time frames, but the lower time frames exhibit a definite trend, you may have a chance to enter the trend’s direction.
These two moving averages on greater time scales show the 3 EMA below the 10 SMA in the example chart below. The 3 EMA pulled back twice in this 5-minute chart while this situation was present in higher time frames, as seen by the downward arrows, before crossing below the 10 SMA. Each of these crosses may have produced successful short-term trading.
Conclusion
The fact that practically all trend indicators are based on moving averages of some type needs to be publicly acknowledged more. The Bollinger Band, for instance, consists just of the 20 EMA in the center, with channels based on statistical deviations based on the price history range.
Understanding the different types of moving averages and their variations, combining them with momentum indicators, crosses of moving averages, and deviation from moving averages can produce successful forex trading strategies. Traders should avoid relying solely on a few valuable moving averages and use a combination of indicators and techniques for more effective trading.
