How To Trade In Forex With The Moving Average Part I

One of the important groups of technical indicators is trend indicators. Trend indicators allow traders to follow market trends and signal the closing of a trading position when there is a trend change. However, in a market that does not follow trends, price volatility in the sideways, horizontal direction can lead to several money-losing signals (whipsaws). Moving Average is an example of trend indicators. The various ways of trading with the moving average are:

Using a single moving average: This method focuses on the relationship between moving average of a pair’s closing price and its actual closing price. If the price of a pair falls below its moving average price, it indicates a sell signal. If the price of a pair rises above its moving average price, it activates a buy signal. The disadvantage is that price fluctuations in horizontal direction in the non-trending market results in too many money-losing signals (whipsaws).

Using two moving averages (Double Crossover Method): This method produces a buy signal when the short term average (example: 15 days) crosses the long term average (example: 50 days). A sell signal is activated when the short term average crosses below the long term average. The advantage of using two moving averages over the single moving average is that it removes whipsaws. The disadvantage is that the buy/sell signal will be slow because of the time lag that occurs, with the short term average taking a longer time to cross the long term average than time taken by a pair’s price to actually cross one moving average.

To read about other ways of trading with the moving average, click here.

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