Moving average as a trading indicator
Moving averages are very useful as a technical indicator for Forex trading. They can be used both for determining the trend and for determining support and resistance levels. Moving averages are computed by calculating the average of the price over an X number of periods.
Setting moving averages
The most commonly used moving averages are the 200 EMA and the 50 EMA, other popular but less used indicators are the 10, 20, and 100 EMA. The E stands for exponential, which means that the last number weigh heavier than the first, making the moving averages more accurate as the last movements are always most important.
We use moving averages only if there is a clear trend; within a consolidation a moving average is useless. Personally, I remove the moving averages of my chart until I think I might place a trade. Then I add them to the graph again to see whether they confirm or support the trade I want to place. Moving averages are therefore not a decisive factor, they can only give additional confirmation.
Setting moving averages within Plus500
Setting the moving averages within the Plus500 software is very simple. Press the button setup indicators and select the indicator moving average. Here you can enter the desired values one by one. Remember to tick exponentially and select three colors that are easy to distinguish (e.g., blue, red and green).
The position of the moving averages
The position of the moving average can be used to determine the general trend. During a downtrend the moving averages are usually located above the current price, this is a general sell signal. When the moving averages are located below the current price, the instrument is in an uptrend. This is a general buy signal.
It is important to look both at the 50 EMA and the 200 EMA. Both indicators should be located below the price to identify a long set up and both indicators should be located above the price to identify a short set up. In addition, the indicators must be in the correct order: the lowest moving averages should be closest to the price, the highest farthest from the price.
Moving averages as support / resistance
Moving averages can also be used as support or resistance levels. Check whether one of the moving averages is touched multiple times without being broken; if this is the case you can use them as extra support when opening a new position.
When the market consolidates (the price has no clear direction) the moving averages are often quite flat. I the price is not moving in a clear direction, the moving averages are pretty much useless as an indicator; in that case remove them from the graph.
Moving averages: what to look out for?
- The sequence is important: are the moving averages sorted in order? Normally ,the sequence is 20,50,200 where the fastest indicator is located closest to the current price.
- The angle of the moving averages can be used to determine the strength of the trend. A sharper angle is often an indication of the trend becoming stronger.
- Finally, the separation between the moving averages is important. As the distance between the moving averages increases the trend grows stronger.
How to use moving averages?
Moving averages can be perfectly used for helping identify support and resistance levels. I always use moving averages to provide extra confirmation as soon as I want to open a position. to see if there is an additional confirmation of the investment. Most of the time however, I remove the moving averages from the graph: ultimately the price action and horizontal levels are decisive for taking a position in the Forex market.