Forex Trading Basic

Technical Analysis using Moving averages

Trendline Bounce Trading Strategy

Moving averages Technical Analysis: They are the technical indicator par excellence, and its main characteristic is to soften the price action to establish trends in a much clearer way in generally very volatile environments. They are extraordinary to follow trends, and may even to hint when they start or come to an end.
moving averages Technical Analysis

Moving Averages Technical Analysis

They are retarded to be calculated depending on the different prices in the past, and indicator can be established periods of short, medium or long term for its calculation. A shorter the period of calculation of a moving average, more energetic and defendants will be their movements, reacting in a much faster way. To give greater weight to the most recent closing prices over time, plus there are the simple moving average exponential and weighted.

It is customary to work with various averages, fast and slow, on the same graph, paying special attention to junctions between them as signs of possible trend changes: If the quick average (usually between 5 and 20 days) crosses above the slow (between 10 and 50 days), the situation can be understood as upward; if the crossing is down, the situation is considered bearish.

It is important to bear in mind that the use of moving averages in environments where the market is lateral (ie, which has a marked tendency) is not entirely advisable, especially if you intend to use the crossings of fast and slow averages decisions to enter the market.

Moving averages try to eliminate price fluctuations or “noise” and help identify trends. Because the formula for its construction, moving averages are not very useful to anticipate trend changes, yes to confirm them. According to the number of years included, moving averages may be short, medium or long term.

Simple Moving Average

The moving average can be obtained as the simple average of the prices of the N previous periods, ie, adding the prices of N periods and dividing that sum by N. The graph shows the moving average is calculated for each period.

moving averages Technical Analysis

Example:

01/11 1.4222

02/11 1.4230

03/11 1.4250

04/11 1.4285

The simple moving average SMA (4) on 04/11 is:

(1.4222+1.4230+1.4250+1.4285)/4=1.424675

The simple moving average is a follower trend indicator.

A simple technique is to buy when prices move above the moving average (uptrend) and sell when prices move below the moving average (downtrend).

The signal can be confirmed when the moving average has positive slope for an uptrend, and negative slope to a negative trend.

Another common technique is to simultaneously use two moving averages, one long – term and other short – term and interpret as follows:

  • In a downtrend, the simple moving average short – term will be below the long term, when the moving average short to long term (up) short term, this confirms that the trend stopped being bearish.
  • in an uptrend, the moving average short – term will be above the moving average long
  • term, when the average Mobile short – term moving average crosses the long term, this confirms that the trend stopped being bullish.

The moving average gives equal importance or weight to the more remote data in the recent time, differences in other moving averages, as the exponential moving average.

Exponential Moving Average

The exponential moving average, unlike the simple moving average gives more weight or weight to the most recent data. With the exponential moving average traders can identify trend changes more quickly with the simple moving average.

One way of calculating the exponential moving average is as follows:

EMA = current price * K + EMA yesterday * (1-K)

K = 2 / (N + 1)

For example, for a four-N = 4

K = 2/5 = 0.4

DayClosing priceEMA previousEMA current
01/11110109.0100 * 0.4 + 109.0 * 0.6 = 105.40
02/11111105.4111 * 0.4 + 105.4 * 0.6 = 107.64
03/11113107.6113 * 0.4 + 107.6 * 0.6 = 109.78
04/11120109.8109.8 * 0.4 + 120 * 0.6 = 113.87

Both moving averages are trend followers: do not try to predict changes in the trend, but their signals are late. Moving averages are indicators followers, not leaders. The longer the time period, the greater will slow to react moving average. They are useful to identify trends and trend changes confirm. The exponential moving average gives greater weight to the more current than the simple moving average data.

Regarding which of the two moving averages presented here is convenient to use, you should analyze each individual case to make a wise decision.

A simple operative is to see when prices cross the moving average.

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Please note that: Successful Technical Analysis largely depends on the functionalities of the MT4 Platform provided by your broker. If you are new in forex trading, you might consider reading the article on what is the best trading platform, Introduction to MT4 Platform and MT4 Platform functions. We have used a fully functional MT4 platform provided by HYCM Broker. Read why their MT4 platform has better trading conditions from the HYCM Broker review.

READ MORE:

Chapter 5

Technical Analysis in Forex Trading

Lesson 1Types of Technical Analysis Indicators
Lesson 2Forex Trading Trendline Analysis
Lesson 3Forex trading Chart Patterns
Lesson 3.2Double Tops and Double Bottoms
Lesson 3.3Head and Shoulders Pattern
Lesson 3.4Rectangle Chart Patterns
Lesson 3.5Triangle Chart Patterns
Lesson 4Japanese candlestick Trading Strategy
Lesson 4.2Japanese candlestick Trading Strategy Part 2
Lesson 5Support and Resistance Levels
Lesson 6Types of Technical Analysis Indicators
Lesson 6.2Moving averages Technical Analysis
Lesson 6.3MACD Indicator Technical Analysis
Lesson 6.4RSI Indicator Technical Analysis
Lesson 6.5Stochastics Indicator Technical Analysis
Lesson 6.6Technical Analysis with Bollinger bands Indicator
Lesson 7Fibonacci Retracement Forex Strategy
Lesson 8Forex Trading Pivot Strategies

Go back to Main Page: Forex Trading for Beginners

About the author

Syed Nazim

Syed Nazim is the Marketing Manager of RedMaroon, a Digital Marketing Agency for Financial Institutions. He is also involved with Forexing24.com as a writer and financial Analyst. He is a brilliant marketing geek with vast experience in every sector of Digital Marketing. He likes sharing strategies, tactics and proven methods to help you build a business and live the life of your dreams.

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