How to Use Simple Moving Average in Forex Trading - ForeXposed


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Wednesday, September 6, 2017

How to Use Simple Moving Average in Forex Trading

How to Use Simple Moving Average in Forex Trading

The Moving Average (MA)

The Moving Average (MA) is a trend type indicators, i.e. the indicators used to determine the trend happening in the market. The users of this indicator are very broadly, not just in the forex world. If you ever trading stock and using technical analysis, then sure, MA is also used. Because the technical analysis is universal and can be used in all the markets that use the collective data.

MA also can be derived into a new indicator and completely different from the original indicator. The next time when you start to learn MACD (Moving Average Convergence Divergence) then you will know that this indicator is MA, essentially (look at the name).

The moving average has three different variants, namely Simple Moving Average, Moving Average, Weighted and Exponential Moving Averages. Each is a method of moving average, there were differences on how to create and the average between one another. However, how to reading it remains the same, and they all follow the rules that apply to Moving Average indicators. In fact, since the early 2000s, the Moving Average is not only growing into 3 variants but being more than 5 variants that are adapted to its use. But to constrict the discussion, as well as make it easier for you in interpreting this MA indicator, we will only focused on three types of MA.

Simple Moving Average (SMA)

Simple Moving Average (usually called Moving Average, or also commonly abbreviated SMA), is the most simple Moving Average and not using valuations in calculating the movement of the closing price.

Note the following picture of Simple Moving Average with the 10 day period:

How to Use Simple Moving Average in Forex Trading
Though simple, Simple Moving Average (SMA) is effective enough to determine the trend happening in the market.

Broadly speaking, MA can be used for the following:

  • Determine the trend that is going to happen. 
  • Determine the point of support and resistance. 
  • Smoothing other indicators which are too jagged. 

MA applications most widely used is to predict the direction of the trend, while the second and third uses are not too widely. This time, the usefulness of the MA will be focused on its primary uses, that is, to predict the direction of the trend. Whereas the usefulness of the latter will be discussed in its own article, later.

Now let us look at the following MA with 10 periods that applied on the GBP/USD, the period is 1 day: 
How to Use Simple Moving Average in Forex Trading

Note, the part that has been shaded with the blue color. When the price moves up, MA is under currency movements. Conversely, when MA crossing the candlestick, rising trend stopped and continued with sideway situations. Or when the trend goes up happens, then MA penetrating the price, and moving from bottom heading to upwards, it is a sign that the uptrend has ended, and then continued with the downtrend.

Well, what if we use two SMA with two different periods? The results will be very interesting. We'll soon know how the results:
How to Use Simple Moving Average in Forex Trading

Easier isn't it? With the use of two SMA, with two different periods, we can more accurately predict where the prices will move again. When the cross between price and two of SMA has occurred, then the change of the direction of the price will happen. In the picture above, if MA with smaller period (i.e. 10 periods in picture) was below MA with larger period (in the image represented by the 15 periods) then it is an indication that the price is being on the down trend, and vice versa when the smaller period is on top of a larger period then the currency is in trend up.

We also can note, when the range between two SMA is getting bigger then it is likely the trend will continue, and when it starts to narrowing distance between them until the cross between them happens again, it could be concluded that the trend is already ending. Easy isn't it?

About the period of MA used, unfortunately until now there has been not found the best search period rules to use. Indeed need a lot-a lot of practicing and trying (trial and error). You need to take note, the use of the period can vary according to the needs, because, the condition of a currency is dynamic over time. But based on experience, it is recommended not to use periods greater than 40. This meant to not lose MA sensitivity to decide as a trend indicator.

The greater period of MA then resulting MA curve will be more wide and insensitive in accommodating changes in the prices. Vice versa, the smaller the period of the MA the resulting curve of the MA become increasingly sensitive. In this case too sensitive or not sensitive is not a good thing. The more sensitive MA curve then more frequently false signals will be generated and make our trading loss. On the contrary, the more insensitive, the buy or sell signals become more little, the results are we can not make a trade.

Please note the following to more details about the use of SMA,:

1. The SMA was below the price.
Bullish conditions / Uptrend.
2. The SMA is above the price.
Bearish conditions / Downtrend.
3. The SMA is crossing the prices from above.
Trend changes toward bullish.

4. The SMA is crossing the prices from below.
Trend changes towards bearish.

5. The shorter SMA period is crossing longer SMA period from below.
Trend changes towards bullish.
6. The shorter SMA period is crossing longer SMA period from above.
Trend changes towards bearish.

7. The longer SMA period is above shorter SMA period.
Bearish conditions / Downtrend.
8. The longer SMA period is below shorter SMA period.
Bullish conditions / Uptrend.

That's a concise explanation of Moving Average. Don't forget to read other articles from this website to extend your knowledge about technical analysis.