Trading The Moving Averages

Today we'll talk about the most commonly used indicator of trading the forex, the moving average. Generally, I will use a moving average on the daily fx chart to help me see clearly the direction of the trend.

There are two MA's that I really like...one for short term and the other for long term.

To watch the long term direction of the trend, I prefer a 200 day simple moving average. This smoothes out the price action of the last 200 days, just as the name implies. The direction of the MA is the direction of the trend. If the direction of the 200 MA is upward, the trend is up. If it is down, the trend is down. Pretty simple. But the next thing you need to make note of is not simply the direction of the MA, but also it's relation to the price. Is the price below the MA? That's important.

If the MA is pointing downward, and the price is below the MA, you have a real bear trend. (The opposite would be a bull trend.)

If the MA is pointing down and the price has moved above it, you have one of 2 circumstances: either a retracement before the downward trend continues, or a reversal is underway. How can you tell? Essentially, always be inclined for the tend to continue. That means as soon as the price shows signs of weakening, and begins to move back below the MA, it is an excellent time to go short. On the other hand, if the price extends strongly above the MA you'll want to see if when it returns to the MA, does it stop, or does it break back down through it? If the price action stops, you may have a new trend starting.

Often price action will start basing around the 200 MA, then will start moving upward to evidence that a new bull trend is starting.

If you have gone short already when this happens, simply exit with your loss and move on to the next trade. Remember, we are all wrong when the trend changes. There's no way to predict that. it just happens. Don't let it bother you. Just hop on the train the other way!

Tomorrow, we will discuss the placement of a 50 day MA on top of the 200, and using that for a good indicator of shorter term movement.

Happy Trading!