How to Trade Forex using Moving Averages

Forex Moving Average Based Strategies

Forex moving average based strategies are some of the oldest trading methods around, and they are still very effective when done in the right way.

Of course, the days when you could utilize a simple moving average crossover strategy to easily profit from the trends in the Forex market are over. As traders and institutions become more sophisticated, so will your trading tools and strategies have to adapt and grow together with them.

However, the moving average is still a vital part of any good trading strategy, as you will see. Here are my best Forex moving average based strategies and tips to give you an edge in your Forex trading.

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Ways To Use The Moving Average In Your Trading

Typically, most strategies these days won’t be purely focused on moving averages. That said, the moving average is still a very useful tool with which you can determine key levels that your competition are looking at, as well as to define low risk and high reward entry points when you are trading the trend. Firstly, you need to know that there are a few different ways of displaying the moving average on your price chart. You can opt for the simple moving average or SMA which is basically an unweighted average of the prices in the past x periods, or the exponential moving average or EMA which is a weighted average of the prices x periods that places more weight on the more recent prices.

When you are using the moving average indicator to give you a picture of the key levels that your competition are looking at, it’s good to do some research into the popular moving average indicator settings  that the leading analysts in the industry use. Considering that many people will simply follow their indicator settings, these levels will become some sort of a self fulfilling prophecy within the market. For example, one popular moving average indicator practice in the industry is to use the 5 period and 20 period SMA to gauge the shorter term and longer term trends.

My Best Forex Moving Average Based Strategies And Tips

While the moving average crossover strategy is still very sound in trending periods, more often than not you will end up giving back all your profits and then some during sideways periods, especially volatile ones. One way to avoid this common pitfall of moving average crossover trading is to add a trend indicator to your chart as a filter. The ADX is a particularly good trending indicator which reliably shows you how “trending” the recent prices are. Anything below 17 on the ADX shows that there is close to zero directional bias within the price, but if the ADX is 17 and above and rising, then you have the beginnings of a good trend shaping up. It’s best to enter at around this area, and then exit when the ADX and trend peaks.

Another good application of the moving average in your trading is in conjunction with multiple timeframe analysis. Generally, it’s a very good idea to have a chart of a higher timeframe open to give you a bigger picture view of the overall market trend and also the key points that the traders viewing that timeframe are looking at as well. When you plot the moving average on both timeframes, you will get a clear picture of where the price is in the bigger scheme of things. If it is in the “average price zone” on both the higher and lower timeframes, then it may be a good place to enter and ride the trend.

Video that Explains How Trading on Moving Averages Works:

The Final Word On Forex Moving Average Based Strategies

All in all, Forex moving average based strategies are still very much a staple in any serious trader’s arsenal. There are many powerful and effective uses of the moving average in trade analysis and management, especially when you adapt the timeless moving average crossover system.