HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
XM information and reviews
XM
86%
NordFX information and reviews
NordFX
86%

What is a moving average and how do I use it?


Moving averages are one of the easiest types of technical indicator to understand and use. They provide a simplified view of the price action of an asset, with most of the "noise removed". A simple moving average is calculated by finding the average price of the previous number of periods.

What is a moving average?


In trading terms, a moving average is part of technical analysis used to examine price charts of a certain financial asset. A trader will calculate a moving average in order to determine and the constant average price that is always updated and accurate. By calculating the moving average you avoid random fluctuations in price but you will be also able to see the direction of the trend and identify the support and resistance levels of the financial asset. 

Moving averages always need to be considered in the context of market structure. They can give an indication of short, medium and long-term trends, but this depends not only on the length of the MA but on the timeframe being observed. There is no magic length for a moving average – you can either stick to parameters that make sense to you or find parameters that suit what you require for the chart you are examining.

If you have a long time period for the moving average then this probably will mean that there is more of a lag. For example, if you had a time period going over 100 days it would have more of lag than if you had a time period of 10 days. Traders commonly use 15, 20, 30, 50, 100 and 200 day time periods for determining moving averages, however, it is important to note that moving averages are a completely customisable technical indicator. The average will be sensitive to price fluctuations and even more so if it was used during a short time period. 

Many traders prefer to use exponential moving averages (EMAs) because they give more weighting to recent prices. They are more relevant to shorter averages, and for more than 50 periods a simple moving average usually suffices.

As an analysis tool, there are three ways moving averages can be used to define a trend. Firstly, you can use the direction of the MA – if it’s pointing up, the trend is up, and if it’s pointing down, the trend is down. Secondly, you can determine whether the price is above or below the moving average and use that as an indication of the trend. Finally, you can use two moving averages of different lengths – when the shorter one is above the longer one, the trend is up, and when it’s below the longer MA, the trend is down.

You should explore the different time frames and figure out which one works best for you. Below we run you through different types of moving averages. To practise trading the financial markets try Eightcap’s free demo trading account, gain access to over 200 financial instruments with $100k in virtual funds. 

Simple Moving Average Cross-overs


Moving average crossovers are a straightforward way to use two MAs to define trends. Simply buy when the shorter MA crosses above a longer MA and sell when the shorter MA crosses below the longer MA. Some traders use this approach to maintain a long or short position at all times, while others use it to switch between a long position and no positions.

This method does have some drawbacks. While it is profitable when there are strong trends, during periods low volatility rangebound markets, trading it will often generate false, unprofitable signals. The following hourly chart of AUDUSD illustrates two very profitable trades, followed by a number of false signals.

AUDUSD 60-Minute Chart with 30 and 50 period Moving Averages

Momentum Trades with the Trend


A better approach is to use other indicators and techniques to enter trades in the direction of the trend, using moving averages to define the trend, but not to time entries. There are several ways to do this and several indicators, including a MACD, Stochastics and RSI that can be used.

An example using the RSI is illustrated below on a 15-minute chart of the GBPUSD pair. To use this technique, you use the moving averages to define the trend, and then enter trades in the direction of the moving average when the RSI rejects the 50 level. Positions can be held until the price crosses the longer moving average, or a trailing stop can be employed.

GBPUSD 15-Minute Chart with 50 and 100 period Moving Averages

Buying and Selling the First Pull Back


Another simple technique is to buy or sell the first price retracement after one moving average has crossed another. For long trades, make sure the shorter MA is above the longer MA and the price is above both MAs. Then the trader will wait for the price to retrace between the two MAs and then enter a long position when it crosses back above the shorter MA. Use the lowest price of the retracement as an initial stop loss and hold the position as long as the price remains above the longer moving average. Simply do the reverse to enter a short position after a retracement during a downtrend.

Tripple Moving Averages


Another simple strategy is to use three moving averages. The two longer averages are used to define the trend and the shorter average is used to time your entries. You can use a 5, 10 and 30 period EMA, or any similar combination preferred on the chart you are trading.

When the middle average is above the longer average you are only looking to enter long positions, and when it’s below the longer average you are looking to enter short positions. If the trend is up, you wait for the short EMA to cross below the middle EMA, and then cross back above it before entering a long position. If the trend is down, you wait for the short EMA to cross above the middle EMA and then cross back down before entering a short position. You can hold the position until the middle EMA crosses the longer EMA.

The following USDCHF hourly chart with a 5, 10 and 30 periods EMAs, illustrates two very profitable opportunities provided by this strategy.

USDCHF 60-Minute Chart with 5, 10 and 30-period Exponential Moving Averages

Using the 200-day Moving Average to Define Long Term Trends


The 200-day simple moving average is widely used as a gauge of the primary trend for stocks and equity indices. Its often used for other markets including forex and commodities. Quite simply, an asset is said to be in a long-term bull trend when the price is above its 200-day simple moving average, and in a bear trend when it’s below the average. The following daily chart of the EURUSD pair illustrates how effective it can be, but it is worth pointing out that it is not always this effective.

Conclusion


As you can see there are several ways to use moving averages to guide your trading. They’re very easy to use and apply and can help you identify trading opportunities, provided prices are trending. It’s important to consider the bigger picture and be cautious if prices show signs of consolidation or rangebound action as this can result in moving averages losing some of their effectiveness.

#source


RELATED

Know Your Heroes: Successful Traders of Modern Era

We bet you've heard many times that a great journey starts with a small step. What if we say that success is just a journey, not a final destination. But where you have to...

How Does Christmas Affect the Stock Market?

It’s this time of the year where businesses and individuals begin to power down and ready themselves for the arrival of Santa and his reindeer. However, many traders continue...

Introduction To The Emerging Financial Asset Class

Cryptocurrencies are digital currencies built on blockchain technology that exploded in a few years from an industry worth just millions of dollars into a booming...

How to Build and Diversify Your Ideal Crypto Portfolio

Crypto portfolio allocation is crucial to survival over the longer term. You are betting on the future when trading a cryptocurrency or investing in it. The future is uncertain...

How to make money on Forex

Are you eager to make some profits on Forex? Get ready for some valuable insights. Ready for your Forex journey?

Choosing the Proper Forex Trading Strategy

A simple trading strategy is what most traders choose as a starting point. For instance, when a certain currency pair tends to come back from a particular...

Trading Metals: A Comprehensive Guide for Beginner Traders

Metals trading, encompassing a spectrum from gold to nickel, offers unique opportunities in the financial market. For beginner traders, metals provide a stable, diverse, and intriguing avenue for investment and speculation...

Why Choosing The Right Broker Is Critical

Forex trading is an equal opportunity vertical. There are no exams, no prerequisites, no prior experience needed to start trading. All you have to possess...

Basic guide to Forex risk management strategies

Trading risk management is vital to becoming a successful trader and making money online. Learn the risks of poor risk management and discover how you could...

Investing In Artificial Intelligence (AI): A Beginner’s Guide

Investing in artificial intelligence (AI) has become an increasingly popular choice for investors as the technology continues to reshape industries and drive innovation...

Mastering the Art of Automated Trading: A Comprehensive Guide to Trading Robots

In the digital age, trading robots have revolutionized the financial markets, providing traders with a high-tech assistant to navigate the complex world of trading...

Understanding the Difference Between Trading and Investing

In this article, we are going to talk about the differences between trading and investing. They are wide-ranging however, they are both good ways of potentially making...

Swap, Spread and Everything You Need to Know about Forex Market Commissions

It comes as a surprise for many newbies to see a negative balance when they open their first trade, although the price has not moved. It comes to...

An Introduction to Precious Metals

Precious metals have been used as an investment option as well as a method to store wealth, with gold being the most commonly used. Today there are many ways to trade...

Bitcoin For Beginners: How To Get Started With Cryptocurrency

Bitcoin is the talk of the finance world once again, beating stocks, gold, oil, and more in ROI over the last decade and more of its history. But the cryptocurrency...

10 Reason to Trade Forex

Foreign exchange, or more colloquially known as forex or FX, is the buying and selling of currencies to make profits based on the changed currencies' values...

Unpacking Demo Trading Accounts: Your Comprehensive Guide

Venturing into the world of trading can feel like navigating a maze, especially when you're diving into complex domains like forex, precious metals, or cryptocurrencies...

Guide to Account Security: Safeguarding Against and Addressing Scams

At forex-ratings.com, your security is of paramount importance to us. Our mission is to offer you a digital environment where you can invest, trade, and communicate confidently...

The Worst Mistakes to Avoid When Trading Forex

When someone tells you that trading Forex is easy and you can make tons of money with a few flicks of a finger, know that he is either a fool or a charlatan. Before...

How to stop qwertying your way to hackers: 5 internet security tips from OctaFX

Who will you blame if you wake up one day without a job and with no money on your bank card? Yourself. That is if you don't follow internet security tips. The global broker OctaFX outlines the main do's and dont's of staying safe online.

Vantage information and reviews
Vantage
85%
FP Markets information and reviews
FP Markets
81%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.