November 30, 2010
3 Ways You Can Use Moving Averages To Trade The Forex Markets
Moving averages are one of the most popular types of technical indicator amongst forex traders. They can be used in a variety of different ways to help find winning forex positions, and in this blog post I want to discuss three of the main trading methods you can use.
1. Moving Average Crossovers
By plotting two moving averages - a short-term moving average and a long-term moving average - you can get strong trading signals when the short-term one crosses the long-term one because this often signals a change in trend.
So to give you an example, I like to use a 5 period EMA (exponential moving average) and a 20 period EMA on the 4 hour chart. I then wait for the EMA (5) to cross through the EMA (20) to provide me with a strong trading signal (using a couple of other indicators for confirmation).
(Click here for more information about moving average crossovers).
2. Moving Average Confluence
Another way you can use moving averages is by plotting three or four of these on your chart and then waiting for them all to come together. So if you use 5, 20, 50 and 200 period moving averages, for example, you want to wait for them all to be closely bunched up against each other because this often indicates a period of consolidation, and more importantly that a strong breakout is about to occur.
3. Moving Averages As Price Targets
If you are a long-term trader you can also use long-term moving averages as natural price targets, particularly when trading price reversals. The 200 day moving average (simple or exponential) often acts as a magnet as well as a natural support or resistance level, so it makes sense to think about exiting a position close to this moving average.
You can find out more about how I trade moving average crossovers by filling in the form above and checking out my 4 hour trading system, but you can see what I mean about the other two methods by looking at the daily chart of the GBP/USD pair below.
As you can see, the 5, 20, 50 and 200 period EMAs came together at the start of September, indicating a period of consolidation, and then we had a big breakout to the upside where the price went from 1.55 to 1.61, and ultimately all the way up to 1.63.
We then had a strong price reversal and the EMA (200) again acted as a magnet because the price hit this moving average at around 1.56. On this occasion it acted as a support level very briefly, but this was short-lived and the price has since dipped below this level, which is an ominous sign.
Anyway the point is that there are various ways in which you can use these moving averages to trade the forex markets.