What Is a Moving Average?
Today I would like to talk about using moving averages on your charts. First, let me explain what this is and how it works. A moving average is a lagging forex indicator, which displays data from the past. It means, that on your current chat you can view previous movements of a price.
So, this works like this: you place a number in the indicator, such as 200, and choose an experiential moving average. The indicator will now go back 200 candles and will place a line on your chart. The line on the chart is a moving average of the 200 candles.
Note that most financial networks and professionals have the 200 EMA on their chart only. I prefer to use 200, 55 and 10 EMA on my trading candlestick charts.
How to Use Moving Average?
You can use a moving average in many ways. For example, it would be a great move to enter a trade after a cross of two moving averages. We see this a lot in our trading, I have to say, this is like an insurance policy, as it will keep you out of trouble.
Let me give you an example of how you might use this. Let’s say you are at resistance on your chart and looking to sell this pair. You decided to place a 10 EMA on your chart and price is coming to your entry level. It would be nice to see that 10 EMA above price before you would make that entry.
The opposite would be, if you are long on a trade, price is at support and you want to buy. Well, the same strategy applies — you would like to see the moving average below price to help your current get price to move up.
Moving Average on a Real Chart
Let’s take a look at the chart above. Please note that the price action is not important, as we are going to look at the moving averages only. There are two moving averages here: the 200 EMA is marked as a green line on the chart and the 20 EMA is the red line. Looking at the left side of the chart, you can see that the 200 EMA is pointing to the upside. This might indicate that the price will continue to climb. Great move to be bearish in this case.
I think one of the most important points about the 200 EMA is that price is attracted it. I encourage you to look at several charts with the 200 EMA and see how price likes staying around this level.
Now let’s look at the red line on the chart. It’s our 20 EMA. The first thing I noticed was how close the red line is to our price. The reason is that this average displays the price only 20 candles away from our current price. A place where you would like to see this 20 EMA depends on what direction you are going.
Remember, I told you that the moving averages crossing each other could be a possible trade entry? On our charts such crosses happened twice. On the left side we see a crossover, where the 20 EMA crossed the 200 EMA to the downside and the price continued to move down. The second crossover was when the 20 EMA crossed the 200 EMA to the upside and you see that the price continued to grow. You could have made some profits on both of these moves.
Remember, this tool might help you predict how the price will act and when to enter your trade.
I would like to thank you for your time and wish you much success in your trading.
William K. Gilday
FXCL Forex Markets Expert