In the world of Forex, the moving averages can be used in three main ways:
To help in identifying the flow of market. To help in identifying resistance and support level. To help in performing trades using crossovers.
Moving averages to identify the market trend:This can be done by planning a single flowing average on the chart of any currency pair. And the time when price action appears to stay above the moving average, will be the indication for the uptrend of the pair.
Apparently, the time when price action appears below the moving average, will be the indication for the downtrend of that currency pair. In the market during the uptrend, faster moving average will always be above the slower moving average and the reverse is true for a market on a downtrend. In case you connect this information with other strategies, you will surely be getting big reaps in the business.
Moving averages to identify the resistance and support level:Moving averages can also be uses as dynamic resistance and support level. Here the dynamic is used as they are completely different from horizontal resistance and support lines, as moving averages changes quite often depending on the happening in the market.
Most of the traders and forex broker use this as important resistance and support levels. To use this strategy trader generally enters with long positions when the price lowers and the touches the average or short positions when price rises and reaches the moving average. Sometimes, price may pierce the moving average to the other side before it returns to the current trend. Hence, to prevent from being caught in false breakout, you could include another moving average to the chart.
Moving average Crossovers to perform Trades:The time when two or more averages are planned on a graph and the crossover occurs; this generally gives signals for the potential trade opportunities. It is essential to observe that all the crossover strategies have very much similar kind of interpretations.
The time when two moving averages are used, a signal to buy is engendered when the short term average extend over the long term moving average i.e. bullish crossover. On the other side, a signal to sell is engendered when short term moving average extends under the long term moving average i.e. bearish cross over.
The moving crossover technique works best during the trending market. When market goes upward, buy signal becomes ruling, while at the same time in case when market comes down sell signal becomes more ruling. Generally most of the traders quit the position when new cross over occurs.