If you do not have a good understanding of what exactly is moving average, you can take a look at my previous blog post on Forex Moving Average Explained.
In this post, I will be sharing with you some tips on how I trade forex using the moving averages.
First of all, I only use the exponential moving average (EMA) in my trading as I find it to be more dynamic and responsive to price movement compared to simple moving average (SMA).
Here are how you can make use of EMAs in your trading
1) As a Trend Identifier: The EMA is a good tool for identifying trend and I rely entirely on it to look at trend on all time frames. All you have to do is to plot 1 or 2 EMAs with setting like 100 or 200 and you will be able to look at the current trend of the market.
If your EMAs are all sloping downward, you are in a down trend and if your EMAs are all sloping upward, you are in an uptrend. (It is just that simple to use)
2) As a Strength Identifier: Other than being able to identify trend, you can make use of moving average to look at the strength of the trend.
There is no point in riding a trend that has no momentum and therefore the EMA is a good tool to check for momentum in the trend. All you have to do is to look at the gradient of the EMA, a steep gradient usually indicates a strong momentum in the trend while a gentle gradient usually indicate a lack of momentum in a trend.
3) As an Entry Signal: In order to use the EMA as an entry signal, you will need the help of either the double moving averages crossover or triple moving averages crossover.
Double Moving Averages Crossover – This is the plotting of 2 EMAs, a fast and a slow one. Whenever the faster EMA cuts above the slower EMA, it produces a BUY signal and when the faster EMA cuts below the slower EMA, it produces a SELL signal.
Triple Moving Averages Crossover – This method is pretty similar to the double moving averages crossover except that it has 3 EMAs plotted instead of 2. I would say that this is more conservative as you need the faster EMA to cut through the other 2 EMAs to create a buy or sell signal.
However, I do not trade based on the crossover alone as I find them pretty risky at time. I prefer to add some forex indicators like the MACD, Bollinger Bands and the Stochastic to confirm the signal before I enter my trade.
The above are some ways you can trade forex using the moving averages. However it is better for you to add the use of other forex indicators to strengthen your trading strategy.