What’s the best moving average for day trading Forex? In the first tutorial of moving averages, we’ve learned what a moving average is, the three types of moving averages, and their calculations. In the second part of this tutorial, we’ll discuss how to use moving averages to identify the direction of a trend. How they can be used to enter and exit trades. And finally how to trade moving average crossovers. We’ll look at the real-time examples and compare different moving averages and different time periods as well. But at first, let’s once again discuss the importance of the time period in the moving averages. It’s probably the most important part that we’ve also touched on briefly in the previous tutorial.
When it comes to the best moving average in day trading Forex, the 9 exponential moving average is one of the best. You can use it to find the best entry and exit for a trade. And the “ride the 9” strategy is one of the most reliable ways to trade anything; stocks, options, futures, and Forex. As a result, make sure to have the 9 ema on your chart. Then you can pair it with patterns; like bull and bear flags.
The reason why this topic needs more detailed discussion is that it can help to avoid fake trading signals. The fake trading signal is the most common phenomenon traders face every day. So if you’re analyzing a market, remember the higher the time period the better the signal is. Therefore, a signal that may have been valid in the 50-period moving average could turn out to be a fake signal on a 20-period average.
To understand the importance of the higher and lower periods and how long periods can filter out fake signals, let’s take look at the below EUR/USD chart; on which a Simple Moving Average is plotted with 14 and 50 time periods.
The red line is representing the 14 periods. And the yellow line is representing the 50-period average. The market was in a downtrend but made a slight correction. You’ll notice the area highlighted at the correction peak. In the correction, the SMA-14 had already moved lower and indicated a buying signal.
Whereas the longer period average SMA-50 kept above the price. It filtered out the temporary noise, and continuously supported the downwards bias. As soon as the price touched the SMA-50 line the market followed its on-going downtrend. So, if you’d gone long using the SMA-14 signal, you would’ve ended in a negative position.
That’s why the time periods are really important in moving averages. And you should be aware of that while reading a signal from the moving average. Now that you understand the importance of the time periods in the moving average. Let’s see how the best moving averages can be used for day trading Forex.
The most common way of using moving average is by taking its line as a support or resistance area. For instance, if the price is keeping below the moving average and at some point, the price goes up and touches the moving average line it can be taken as a potential sell signal.
Likewise, if the price of an asset keeps above the moving average and when it drops to the moving average line it can be taken as a buy signal. So you can use the moving average for day trading Forex as buy and sell signals. As well as support and resistance.
To understand the moving average support and resistance concept, let’s take an example of the USD/CAD chart below. On which a 20 period SMA is plotted. The price was falling and the moving average was keeping above the price.
Right at the area indicated in the chart, the bulls attempted to take control.They took the price up towards the moving average resistance line. As the price touched the resistance line it dropped back to its original direction.
It may have become possible because of many traders waiting for the indication to take short entries at the signal. When there’s a battle of buys and sellers, you’ll see that reflected in charts and the moving average you choose for day trading Forex.
When it comes to choosing a moving average for day trading Forex, make sure to take a look at EMAs. Forex traders like to use the 5, 10, 20, or 50 just to name a few. There are other exponential moving averages you can use as well. Make sure to practice trading and find out which moving average works the best for your trading style.
Some traders also use moving average to get a general idea about the on-going trend. For instance, if the market is rising and the moving average is keeping below the current price, it indicates the trend will likely continue its upward direction.
Similarly, if the price is in a downtrend and the moving average line is above the current price it is an indication that the downtrend is likely to continue. When it comes to day trading, the trend is your friend. You need direction.
The interesting thing about moving averages is that they can be used alone as well as in combination with other moving averages. So when you plot two moving averages on the chart with a short and long period you have the opportunity to trade moving average crossovers.
They can be used to determine the entry and exit points as well as a change in the direction of the trend. So when the shorter period average crosses the longer period average from below it indicates the price of an asset may rise in other words it’s a bullish crossover.
Conversely, when the short period average crosses the longer period average from above it signals a potential decline in the price of the asset, and in other words, it is a bearish crossover. To understand the crossover signals, take a look at the EUR/GBP chart below on which two moving averages with 20 and 50 periods are plotted.
The red line is the 20-period while the yellow line is the 50-period average. The market was largely sideways until the short period average crosses above the longer period average from below giving a bullish crossover signal. Following the signal, the pair moves higher from 0.83400 towards 0.8700.
When using the best moving average for day trading Forex, you want to find the one that works the best for you. Each trader has a different strategy. As a result, different moving averages work better for different people. There’s no wrong one to choose if it works for you.