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Moving Averages 101 - The Ultimate Guide to Trading Forex using Moving Averages
Moving averages are the most popular trading indicator for technical analysis
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They can signal market and trend direction, act as support and resistance, provide a trading edge and so much more...
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On this page, you will learn everything you need to know about using moving averages when trading the Forex market...
"Moving averages are by far the most useful indicator... Are they lagging? Yes. Do they provide false signals? Yes. Are they still worth using? Yes!.. Show me a price action pattern, candlestick setup or technical indicator that is 100% reliable. You can't, as it doesn't exist!... The key is to combine moving averages with other forms of analysis. Layering price action and indicators is key!"
Moving Averages - An Introduction for Beginners
When it comes to Forex technical analysis, there are many technical indicators that can be used. The most common indicators include the Relative Strength Index (RSI), Volume, Bollinger Bands, and the MACD, just to name a few. Moving averages are by far the most popular indicator though. They are used by most traders - independent traders and professional traders.
What are moving averages?
Moving averages are as the name suggests - they are averages that move. The moving average represents the closing price of the market over a specified period of time.
SMA or EMA?
The two most popular moving averages are the simple moving average (SMA) and the exponential moving average (EMA). The difference between the two is that the EMA puts more weight on recent price data than older data, the SMA does not.
What do moving averages look like?
Averages are plotted on price charts and joined to create a line or wave across a price chart. These waves are generally coloured, and will look like this...
Moving Averages Settings
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There are various types of moving averages, the most common types being SMA's and EMA's.
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Moving averages only have one variable though, no matter the type of moving average being used. The variable being the moving average period or length.
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A moving averages period is the amount of candles the moving average uses in it's closing price calculations.
A shorter period makes a moving average "faster". Meaning it reacts quicker to recent price data and is generally closer to price. Faster moving averages can be more jumpy in how they are displayed. A longer period makes a moving average "slower". Meaning that the moving average does not react so quickly to recent price data and is generally further away from price. Slower moving averages are generally more smooth in the way they look.
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Below is an example, which may be helpful. The black moving average is a slower moving average with a period of 200. The green moving average is a faster moving average with a period of 25...
What are the best Moving Average Settings?
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This is a common question that is asked by a lot of traders. The first thing to mention is that no moving average setting is going to provide an indicator that is 100% reliable and accurate - that's not possible. The second thing to mention is that there is no single setting that is right for everyone - the way you trade and analyse the market, and the strategies you use, have an impact on the moving average period and type you choose.
Moving Averages for Swing Trading
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If you watch Bloomberg or have seen professionals trade, you may have noticed that there are three periods of moving averages that are commonly used; the 50, 100 and 200 period moving averages. These are the settings I use and recommend you use too. I use these moving averages on the weekly, daily, 4 hourly, and 1 hourly time-frames.
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There are two main reasons why you should use the 50, 100 and 200 period moving averages...
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1. It makes total logical sense to watch and use what the professionals are watching and using. You want to be trading like them.
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2. They work. These periods are more reliable than most other periods, especially when it comes to dynamic support and resistance (more on this later).
Moving Averages for Day Trading
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When it comes to day trading, moving average periods used by traders varies greatly.
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Some day traders still use the periods recommended above i.e. they analyse higher time-frames with those moving average periods and seek to day trade from that information.
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Day traders that focus on low time-frames, such as the 1 minute, 5 minute, and 15 minute charts, tend to use the 7, 14, and 21 period moving averages.
SMA vs EMA
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Which moving average type you choose is really down to your personal preference. I don't believe it makes much of a difference. I personally use SMA's and recommend you do the same.
Using Moving Averages to Trade Forex
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As mentioned previously, moving averages are the most popular trading indicator when trading. I love them. They provide an edge and can be used in so many helpful ways, including chart analysis, market entry, and market exit.
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Below are details on the most common ways that moving averages can be used...
Current Market Direction
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Moving averages can be used for market direction - for confirming current downtrends, uptrends, and ranges.
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Having both a faster and slower moving average on your chart is the best way to use moving averages for market and trend direction. I suggest a combination of the 50 SMA and 100 SMA or the 100 SMA and the 200 SMA.
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When the slower moving average is above the faster moving average (100 above the 50), this can confirm a downtrend. When the faster moving average is above the slower moving average (50 above the 100), this can signal an uptrend. When the moving averages are crossing and moving sideways, this can confirm market indecision or a market range.
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Below are some examples. The slower moving average is red. The faster is green.
Trend and market direction can also be confirmed by simply paying attention to the direction of a single moving average. If the moving average is moving in a general downward direction, price could be down-trending. If the moving average is moving in a general upward direction, price could be up-trending. If the moving average is moving sideways, price may be indecisive.
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Change of Market Direction
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When two moving averages (a faster and a slower) cross, this can signal a change of market direction.
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Some trading strategies are based on moving average crossovers.
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When bullish moving averages cross and become bearish, this can signal a change from an uptrend to a downtrend. When bearish moving averages cross and become bullish, this may signal a change from a downtrend to an uptrend.
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Below are some examples...
"Trading moving average signals by themselves will not make you a successful trader. No profitable trading strategy is based just on a technical indicator... Moving averages (and all indicators) should be used for confirmation of market analysis or as part of a trading strategy, not the sole reason to enter a trade"
Moving Average Support and Resistance
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This is my favourite way to use moving averages.
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Moving averages provide support and resistance. This is often referred to as dynamic support and resistance.
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Dynamic support and resistance can be used for trade entry, trade exit, and market analysis. It can be a super addition to a Forex trading strategy.
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In the examples below, you will see that when price reaches a moving average, it can reverse at the moving average. Just like how price can reverse around horizontal or diagonal support and resistance.
Moving Average Trading Strategies
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Moving averages can be used as a major part of any trading strategy. My own trading strategies use moving averages to confirm market direction, as support and resistance, and to help me adjust my stop-losses.
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You can develop your own Forex trading strategies based on...
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The Moving Average Crossover (trend reversals)
The Moving Average Pullback (dynamic support and resistance on trend retracements)
Moving Average Direction (trends and market indecision)
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You can use moving averages to help with any of the following, as part of a trading strategy...
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Trade Direction
Trade Entry
Trade Exit
Take Profit Adjustment
Take Profit Placement
Stop-loss Adjustment
Stop-loss Placement
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