Moving Average: The Essential Tool for Trading

If there's any practical indicator that can remain simple to read while potentially shed significant insight in conjunction with other less-simple indicators, pull your tabs and bet it on Moving Average. It's that good.

If you, by any chance, don't know what Moving Average indicator is in Forex, you're either a total newbie or you've been rolling in the deep within that isolated island no one is buying to get onto.

Why You Have to Learn Moving Average

Unless you're a hardcore trading expert who can predict market trends just by intuition, you're better off learning Moving Average. Here's why. This indicator follows market trends according to past trading data, allegedly the simplest yet the most popular at doing that particular job.

The simplicity of Moving Average indicator is that it easily shows where market trends head, either up, down, or sideways. Even more, a long period of Moving Average can be used to navigate where the support or resistance starts.

One thing not to forget, Moving Average follows the market trend, and by that it only shows current market trends relative to what they were in the past period, it cannot predict the upcoming market trend by itself. Fret not, Moving Average is still viable to help you read where the trend will end up anyway, as history does repeat itself.

Moving Average Formula

A Moving Average is a technical indicator to smooth out price data by averaging the closing prices over a specified period. Moving Averages often identify trends, support and resistance levels, and generate trading signals.

There are two main types of Moving Averages: Simple Moving Averages (SMA) and Exponential Moving Averages (EMA). SMA is calculated by adding the closing prices for a specified period and then dividing the total by the number of periods. EMA is calculated by giving more weight to recent prices than to older prices.

The formula for calculating a Moving Average is as follows:

Moving Average = (Sum of closing prices for the selected period) / (Number of periods)

The Basics of Trading with Moving Average

If there's any helpful indicator that can remain simple to read. At the same time, potentially shed significant insight in conjunction with other less-simple indicators, pull your tabs and bet it on Moving Average. It's that good.

Technically speaking, Moving Average is commonly used to gauge where the trend is likely to rise or fall by calculating the average market price within a certain period (5 days, 30 days, etc.). Therefore we can utilize Moving Average to raise our awareness when either buy or sell signal pops up from data reading.

Those signals are invoked from crossovers when a single line of MA (Moving Average) crosses over the price market or another MA line.

Long period Moving Average (100, 200) commonly encompasses when an uptrend or downtrend occurs. An uptrend is the moment when the market price is above a long-period Moving Average, while a downtrend is just the opposite.

It's popular among more prominent players, especially when the market price starts to cross over long period MA line, as they'll likely open a long (buy) position in an Uptrend. However, short-term traders (day trader, scalper, etc.) prefer to use much shorter period of MA to help them find the encroaching signals.

Those longer and shorter MA line combinations will do wonders, especially for neophyte traders. Help yourself set multiple short period lines (15, 20, 25) and watch it when it crosses over a long period MA line. Consider opening a short (sell) position when short period MA lines dip below their longer counterpart. You may do the opposite (opening long position) when short period MA lines soar above.

Combining Moving Average with Other Indicators

Did I say MA is a lagging indicator? That means you have to open a position before the crossovers signals. To be that perceptive, you can use other indicators in tandem with Moving Averages, such as MACD (Moving Average Convergence-Divergence) and RSI (Relative Strength Index).

Moving Average and MACD

Combining Moving Averages with the Moving Average Convergence Divergence (MACD) indicator can provide valuable insights into market trends and potential trading signals. The MACD is a popular momentum oscillator that consists of two lines: the MACD line and the signal line. The Moving Averages can further refine the signals generated by the MACD.

Here's a step-by-step guide on how to combine Moving Averages with the MACD:

1. Choose two Moving Averages of different lengths. The most common choices are the 50-day and 200-day Moving Averages.
2. Plot the Moving Averages on your chart.
3. Look for when the shorter Moving Average crosses above the longer Moving Average. This signals that the trend may be changing from down to up.
4. Wait for the MACD line to cross above the signal line. This is a confirmation signal that the trend is indeed changing.
5. You can enter a long trade once the MACD line has crossed above the signal line.

One way to illustrate the implementation of this strategy is as follows:

Moving Average and RSI

Combining Moving Averages with RSI is a popular trading strategy to help you identify trends and reversals. The basic idea is to use Moving Averages to identify the overall trend and then use RSI to identify potential overbought and oversold conditions.

To use this strategy, you will need to:

1. Choose two Moving Averages of different lengths. The most common choices are the 50-day and 200-day Moving Averages.
   Plot the Moving Averages on your chart.
2. Look for when the shorter Moving Average crosses above the longer Moving Average. This signals that the trend may be changing from down to up.
3. Wait for the RSI to rise above 50. This signals that the market may be oversold and due for a rebound.
4. You can enter a long trade once the RSI has risen above 50.

An example of implementing this strategy would look something like this:

Traders should familiarize themselves with various noteworthy aspects when utilizing Moving Averages, as these indicators are extensively employed across different instruments. See more at Essential Facts about Popular Moving Averages.