Forex Beauty Kit

Moving Averages (MA) – Technical Analysis Indicator in Forex


Jul.19.2013

Moving averages help you identify trends and improve your buy/sell timing.

 

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Let’s face it, both in real life and in forex life, you always need to know what’s trending! Sometimes the candles of all different sizes can make the forex party too crowded and prevent you from seeing the real beauty of the pair’s movement. This is why we often reach out to our forex beauty kit and insert moving averages to smooth out their dancing movements.

 

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Moving averages (MAs) show the average value of a currency pair’s price over a set period. They appear on the forex party dance floor and help your identify the current trend more easily. Simply put, when the moving average is moving up, we would say that the pair is in an uptrend. When it is moving down, the pair is in a downtrend. It is that easy!

Depending on the length of the time frame you use to calculate your moving average, you can create short-term and long-term moving averages. If you want to see the short-term average movement of the pair, you use a shorter period (such as only 5 days). If you want to see a longer-term average movement, you will use a longer period, such as 200 days (duh!). Both short- and long-term moving averages have pros and cons.(See figure below)

Moving Averages - Short Term and Long Term Pros and Cons Moving Averages - Short Term and Long Term Pros and Cons

Let's take a look at the beauty and turn-off of them two:

•Short Term MA
•Beauty: It reacts faster to a trend change
•Turn-off: It's not as smooth as the long-term MAs, so it gives many false signals.
•Long Term MA
•Beauty: It doesn't project as many false signals because it is smoother
•Turn-off: It doesn't react rapidly when the trend changes.

Eight Buy or Sell Signals from Moving Averages

You can use moving averages in different ways. One popular way is using the 200-day moving average to identify buy or sell signals. Depending on its position relative to the current market price, the 200-day MA can project buy or sell signals (false or real!). This is based on Joseph Granville’s technique of technical analysis.

Moving Averages Buy Signals List Moving Averages Buy Signals List

Buy Signals

  1. The MA turns up or horizontal after being in a downtrend. The price crosses above the MA.
  2. The MA is rising. The price crosses below the MA.
  3. The MA is rising. The price is above the MA and gets close to it, but can’t cross or touch it.
  4. The MA turns down after being in an uptrend. The price crosses below the MA big time!

 

Sell Signals

  1. The MA turns down or horizontal after being in an uptrend. The price crosses below the MA.
  2. The MA is falling. The price crosses above the MA big time!
  3. The MA is falling. The price is moving below the MA and gets slightly close to it, but can’t cross or touch it.
  4. The MA moves up after being in a downtrend. The price crosses above the MA and moves far away from it.

The four sell signals are shown in figure below.

Moving Averages Sell Signals List Moving Averages Sell Signals List

Two Is Better than One

How about using two moving averages to confirm the buy or sell signals? You’ll have the best of both worlds! When you let two moving averages slither on your forex dance floor, they can’t help but cross over each other. Sometimes the crossovers can be golden. But some other times—they’re deadly!

Moving Averages Dead Cross and Golden Cross Moving Averages Dead Cross and Golden Cross

Golden cross. When a short-term moving average crosses above a long-term moving average, that means that the speed of the upward movement in a short period has become faster than the long-term speed. So this is a buy signal.

Dead cross. Conversely, when a short-term moving average breaks below the long-term moving average, it indicates that the speed of the downward movement in a short period has increased. So this is a sell signal.

The dead cross is so called because it originates in security trading, where when the prices go down, you are screwed and you lose money. But as we said before, in forex trading you can be a winner even in down markets depending on your position in the market.

Beware of False Signals!!

You might have already gotten used to the idea that forex trading signals and indicators are often just full of $#?*. The forex trading party is just like any other party, and it often acts in an arbitrary fashion, ignoring all the laws and rules. That is why we should never rely on only one method of analysis and should always confirm our decisions with other tools and points of the Invest Diva Diamond.

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