Today we will begin with one of the first in a series of trading tool and strategy guides – an overview of Moving Averages.
With the growth of popularity of Forex trading, as it becomes the choice of many people across the world that pursue a work from-home and passive income lifestyle, the demand for accurate trading tools and techniques is a common trait of all beginning traders. Among other important things, a beginner trader should know what Moving Averages are, how they are calculated, and how to apply them as an on chart indicator.
The Moving Average is a technical indicator, which visualizes the cost of a specific currency pair over a predefined period of time. As an example, this means that it will identify the average price on a period of 20 or 50 days, or perhaps 10 or 40 minutes, depending on what time frames you are using on your chart at this moment.
As an average value, moving averages can also be regarded as a rounded up summary of markets current activity, and an indicator that identifies the main trend that is currently affecting the market.
Such a smoothing effect of moving averages is very useful, when a trader wants to rid himself of unnecessary noise on his charts, and accentuate the trend direction more definitively.
The main application of moving averages for trade signals and in trading strategies is usually based around two different moving averages with different periods, applied to a price chart. The basic idea is to make sure that one of these moving averages is calculated on a smaller period than the other, say, one with a period of 20 days, and another – 50. Most trading platforms out there support such customization, and even have premade indicator setups with moving averages preset o different periods.
After calculating and applying two of them to a chart, you may take note of points where the two lines cross over. Whenever the moving average that is set to the shorter period crosses over the longer one, that is an indication of a strong uptrend, and a potential buy signal. Likewise, when the moving average that is calculated for a longer period crosses over the shorter one, the trend will go down, and a sell trade can be considered.
This strategy is a great way to begin learning the basics of how forex indicators work, and how trends can be detected. While alone, using only this method may not always bring the best results, combined with other indicators as a confirmation instrument, moving averages are a very powerful tool!