Forex | FX Operator | Currency Trading

Most new traders when started out often used a set of Moving Average for all time frames. However, it is advisable not to do so. Let's take a recap on what is a Moving Average. Here is an article from FXStreet.com by Valeria Bednarik of Trader College LLC and True Market LLC. on how to use MAs in Forex trading.

Topics that will be covered are:

• What is a Moving Average
• Different ways to work with simple moving average(MA)
• How to use a exponential moving average (EMA)

What is a Moving Average?

Moving averages are trend direction indicators that calculate a simple arithmetic average of prices for a specified period, showing the average value of the price of a currency over a set of value.

There are different types of MA:  we use SMA for simple moving averages and EMA for exponential ones. There are also two more kinds of MA: smoothed and line weighted.

The SMA is the simplest one, yet the most used. It calculates the average of the price by adding the prices of the specified period together then divides it by the number of the prices.

SMA = Sum of “x” periods /X

Where x represent a certain number (could be almost any one from 2 to 500 depending of how many historical information your charts include); besides, many chats allows to select a chosen set to apply the calculation: Open, close, high, low, median or typical price, etc.

The EMA, smoothes the MA by adding to the current closing price, the previous value and giving the last prices more weighted value. This type of MA reacts faster to recent price changes than SMA.

The Smoothed MA smoothes the SMA by giving the recent prices an equal weighted to the historic ones. It’s recommended to use it with long term periods to get better result.

The Linear Weighted MA smoothes the SMA, by giving the latest data more weighted value than to more early data. That helps to limit the effect of the price fluctuations of the recent price.

Let’s remind that MAs works better in a trend market and they act worst in periods of  market fluctuations.

Different ways to trade with MA

There are many different methods and settings of Moving Averages a trader can use; in this session, we will include just two methods, with some of the common settings, useful for intraday trading.

On first place, we can use a MOVING AVERAGE BREAKOUT. In this method, you have to draw a Ma in any selected chart. Let’s see an example in a 1 hour chart of EUR/USD. I used a SMA of 20 periods (blue). When the price crosses the Moving Average down-up and there’s a new candle opening above the Moving Average indicator we buy, an when the price crosses the Moving Average up-down and there’s a new candle opening below the Moving Average indicator we Sell.

Chart 1 EUR/USD 1 hour

Another way to trade MAs, is using MOVING AVERAGES CROSSES. In this method, you can use at least two MA, but here at Trader College we generally use three. The first one will be set with a small period (Fast Moving Average) the second one will be set with more number of periods ant the third even with a bigger number of them (Slow Moving Average). Let’ see another example using SMA of 4, 9 and 18 periods in a 4 hours USD/JPY chart.

Chart 2 USD/JPY 4 hours chart

The sky blue is a 4 periods MA, the medium blue represents 9 periods, and the dark one, is for 18 periods. See how, when 4 cuts 9 and then, cuts 18 you have a good trigger. The 4 periods line crossing the 9 ones, is the first signal you have; this signal gets its confirmation when both, 4 and 9 cross 18.

There are lots of combinations we can use to trade using Ma or EMA. Another good combination is 9 13 34. The most important thing to remember is that this particular indicator works better when the market is at a defined trend.

EMA as dynamic supports and resistances

Another way to use EMA, not only as a signal or trigger, is use large ones (50, 60,200), as dynamic supports and resistance for the intraday trading. Of course, as day go by, numbers change, because as I say this is a dynamic indicator. The way to use them, is to check them in a 4 hours chart; with observation you will find out, that generally, prices rebound or stop near that point. You can use them as target prices too.

But take notice, when this EMA are broke, let’s say, for more than the 8% of the pips a certain currency moves a day, that probably means a change of status: if it was a support, then turns in to resistance, and vice versa.

Chart 3 USD/GBP 4 hours

The blue line, is a 200 EMA. The yellow, a 60 periods EMA. See how currency spends a good number of hours “fighting” them, until giving a  trend confirmation.

No matter what system you use to trade, no matter what indicator, always remember two things: do your own back testing, and try to keep it as simple as possible. If you do your own back testing, you will feel confident, as you understand better the currencies behavior; if you keep it simple, you won’t get dizzy with thousands of different signals.

About Valeria Bednarik

Valeria has been an active Forex trader for the last 2 years, specializing in the International Foreign Exchange Market. She also graduates in the Universidad Catolica del Salvador, in Argentina, as a Public Account, specializing in financials and cost managements. She actually manages an important clients portfolio for IFX Markets, Boston and is trader at Trader College LLC.

Happy Amanda  - Moving Average   |124.81.205.xxx |2008-03-11 11:11:54 I ussualy use MA 5, 10, 20, 60, 100, 200. I used together. Also Bolinger and Sar. And chart 5mnt-Daily. Quote 0   0

FXOperator   |2008-03-12 11:29:44 Hi Amanda, Yes EMA is a good indicator to determine where the trend is. Quote 0   0

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