Short-term Trading with Moving Averages
Short term trading will use short periods such as the 10 and 20 moving average periods.
In the example below we use 10 and 20 SMA to generate Forex signals; the signals generated are able to identify the trend as early as possible.
Scalper Using Moving Averages
One of the most widely used method of technical analysis used to analyze currency fluctuations in scalping is the use of moving averages.
The idea behind this indicator is to simply enhance analysis before taking a signal to enter the market. Planning and setting goals in the short-term according to moving averages helps a scalper to identify interests in the market and thus open an order accordingly.
Most of the targets can be established using a specific period on MA. The averages determines whether the trader will invest in the short-term or long-term. In addition, the price action above or below this indicator determines the state of the market for the day.
If a large part of the market is considered to be below the MA, then bias trend for the day is short. Most investors the use the MA as support or resistance to determine where to open a position, if price touches the MA in the direction of the market trend a trade is then opened.
The moving averages are plotted and the intersection point with the price can be used to determine the appropriate entry and exit times in the market. Since there is always oscillation in the market trends and the market will repeat this process of oscillating and bouncing off the MA and this can be used to generate buy or sell signals.
Simple averages are calculated and their approach is based on the observation of price within a particular period of time using sufficient data to calculate it? Their interpretation has provided many scalpers with lots of tips on how and when to transact a currency.
Medium term strategy will use the 50 period MA.
The 50 period MA acts as support or resistance level for the price.
In an uptrend the 50 period MA will act as a support, price should always bounce back up after touching the MA. If the market closes below the indicator then this will be an exit signal.
50 Period Support
In a downtrend the 50 period MA will act as a resistance, price should always go down after touching the moving average. If the market closes above the indicator then this is an exit signal.
50 Period Resistance
50 Day Moving Average Analysis
As your currency pair moves up, there is a key line you want to watch - this is the 50 day moving average. If your the market stays above it, that is a very good sign. If the market drops below the line in heavy volume, watch out, there could be reversal ahead.
A 50 day MA line takes 10 weeks of market data, and then plots the average. The line is recalculated everyday. This will show the trend - it can be up, down, or sideways.
You normally should only buy currency pairs that are above their 50 day MA. This tells you the current direction is trending upward. You always want to trade with the trend, and not against it. Many of the world's greatest investors, past and present, only open orders in the direction of the trend.
Winning currency pairs normally will find support over and over again at that line. Big investing institutions such as mutual funds, pension funds, and hedge funds watch this level very closely. When these big volume entities spot a great currency pair moving down to its 50 day line, they see it as an opportunity, to add to, or start a position at a reasonable level.
What does it mean if your currency pair moves downward and slices through its 50 day line. If it happens on heavy volume, it is a strong signal to sell. This means big institutions are selling their share, and that can cause a dramatic drop, even if fundamentals still look solid. Now, if your currency pair drops slightly below the 50 day line on light volume, watch how it acts in the following days, and take appropriate action if necessary
Long term strategy will use long period such as the 100 and 200 MAs which act as long term support and resistance levels. Since many investors use them, the price will often react to these support and resistance levels.
100 and 200 MAs
In Forex, investors can use both fundamental analysis and technical analysis to help determine whether a currency pair is a good buy or sell.
In technical analysis technique investors looking to gauge supply and demand for a currency use the 200 day moving average to examine data in different ways.
Traders are most familiar with the basic analysis of the 200 day MA is used to plot the long term support or resistance level. If market is above 200 day MA then the the trend is bullish, and if it is below then it is bearish.
One of the ways to measure supply and demand is to calculate the average closing price over the last 200 sessions. This accounts for each day going back in time and shows how this 200 day average has moved.
The reason why the average 200 day MA in particular is so popular in technical analysis is because historically has been used with profitable results for trading in the exchange market. A popular timing strategy is used to buy when the market is above its moving average of 200 days and sell when it goes below it.
With this indicator, investors can benefit from being notified when a currency pair rises above, or falls below its 200 day MA and then use fundamental analysis to help determine if the signal is an opportunity to go long or short.