Even if you are relatively new to the world of trading, you probably already know what a moving average is. This simple indicator had become so popular due to a simple reason: price reacts around it and when that happens, some trading opportunities can be spotted. In case you want to learn more about how to use Mas, stick with us until the end of the article since we can provide some valuable insights.
Best ways to use moving averages
What’s important to know about moving averages is that market participants treat them as dynamic support or resistance levels. You’ve probably noticed many times the price reversing right after reaching an MA (50 SMA, 200 SMA are two of the most important to note). That means there is a large number of orders parked around MAs, translating into potential trading opportunities.
It’s proven that moving averages work, regardless of any fundamental events like monetary policy or GDP. However, what traders don’t manage to realize is that there must be a relationship between the price and a particular moving average. Your job is to study the market and find forex pairs that had reacted recently to a particular MA and wait for the price to do the same.
If you want to trade short-term, then a short-term moving average like the 10 SMA or 20 EMA would be appropriate. Longer-term trades should require higher moving averages like the 50 SMA or 200 SMA, used on any time frame. Some traders use moving average crosses in order to find trading opportunities, but as we’ll see in the second section of this article, that’s not the best approach.
Downsides of moving averages
Same as any other technical indicator, moving averages are not perfect and as a result, traders should approach them with a particular trading mindset. MAs are lagging indicators and not leading indicators (like oscillators, meaning they should not be regarded as a signal of entering a trade. The moving average will change course after the price action made an impulsive move, so anyone opening a trade will be vulnerable to corrections.
Lastly, finding the right balance between short-term MAs and long-term will be quite challenging. The former won’t react to the price many times while the lather will be reached by the price fewer times. However, if you have a rules-based approach to forex trading, moving averages could represent one of the reliable tools for your trading strategy.