The moving average is one of the most widely used technical indicators in Forex trading. While it’s a great trading tool (if you know how to use it), can also expose you to some serious financial errors. However, there are numerous strategies that can be implemented using the MA indicator, and a few are included here.
What is the moving average (MA) indicator?
The moving average indicator is a popular indicator for Forex traders. This formula calculates the average of a market’s changes over a longer period of time (typically weeks or months rather than days) to pinpoint eventual trends, which is critical for a successful Forex trading strategy.
Forex traders widely use moving averages because of the formula’s ability to combine data from a determined time period into more detailed and comprehensible patterns and trends.
Perhaps the most important and satisfying part of Forex trading is when you foresee the way the market is moving, which is where this tool/indicator comes in. In more simple terms, by determining the average of a specific market and seeing its movement over time, you can better predict your next movement.
Another advantage of using the MA indicator is that if you want to calculate it manually and you enjoy the process, it’s relatively easy, unlike other Forex trading mathematical formulas. It’s a simple average of a market’s price over a certain period of time, a feature that also makes it completely customisable. That means you can calculate the moving averages of any market or period you want.
When it comes to setting up your moving averages, there is no best timeframe; the only way to figure out is by experimenting with different intervals until you find the best one that fits your strategy. It also depends on whether you want to do short-term trading with shorter moving averages or long-term trading with longer-term moving averages.
When there’s a shift in the moving average, two things can happen: it can take a downtrend if there’s a declining moving average or an uptrend if there’s a rising moving average. Overall, there are two types of moving averages:
1. SMA or Simple Moving Average
This moving average type can be calculated by adding a number of recent daily closing prices and calculating it to create a new average daily. For instance, to calculate a 10-day SMA, add up the ten recent MAs and divide the sum by 10 to obtain a new MA.
2. EMA or Exponential Moving Average
The second and more difficult to calculate the moving average is the EMA. This moving average applies more weighting to the most current prices. For example, to calculate the EMA, you must calculate EMA over a specific time frame and then determine the multiplier for weighting the EMA. Results can be random because MA is calculated based on less predictive historical data.
Best Moving Average Strategies
1. Ribbon Trading Strategy
This moving average strategy consists of having several SMA or EMA lines, typically somewhere around 10, of different timeframes on the same chart. The chart resembles a ribbon that can give traders a number of details that more straightforward MA charts with fewer lines cannot. Of course, one or two MA lines in the shorter period can help pick up a trend, but the longer ones can either confirm it or cast doubts on it.
This strategy is widely used by both beginner and professional traders due to its flexibility. You can customise this strategy by choosing a number of MA lines and whether they should be EMAs or SMAs.
However, as with many moving average strategies, the ribbon strategy is bound to have many more crossovers which can be overwhelming for inexperienced traders. Investing using a moving average as a complete beginner can be very risky without a stockbroker. You will need an investment account and, more importantly, the expertise of High Leverage Forex Brokers recommended for US clients. So make sure you choose a reliable broker that knows your trading needs.
2. Crossover Trading Strategy
It’s possible to trade the markets using only the moving averages. The downside? You will have to wait for an indicator to cross another indicator, which can last a great deal of time. Advanced traders would normally use the 50 and 200 SMAs (simple moving averages) in a crossover strategy.
A buy-signal notifies you when the 50 MA (shorter-term moving average) exceeds the 200-MA (longer-term moving average). Likewise, you will get a sell signal, when the 50 SMA crosses below the 200 SMA. Trading experts emphasise the importance of selecting the two moving averages related to each other for traders who want to day trade crossover.
With the crossover moving strategy, you can use popular SMAs like 50 and 200 or normal SMAs like 10 and 20, 20 and 50.
3. The envelope Trading Strategy
In a volatile and fast-changing world of Forex, using the wrong trading strategy might cost you dearly because trends can often change. This strategy seeks to remove this unpredictability by adding filters around the MA line.
To “envelope”, you will need two filters in different points, above and below the moving average line – for instance, 1% above and below the MA or 5% in the same case. In doing so, you will create additional lines of support and resistance for the current price to break through, which will help you determine whether the trend promises to stand or not.
With this strategy, many Forex traders will sell if the price crosses beneath the line below or trade a golden or bullish cross if the price crosses the MA.
Lastly, using the moving average strategies for trading Forex will help you better see coming trends. You will also be able to data prices clearer and easier. However, investing using the MA or any technique requires you to have an investment account with a trustworthy stockbroker, so make sure you find the one that fits your trading needs the most.