This gives them a clearer signal of whether the pair is trending up or down depending on the order of the moving averages. On your chart, it would look like this:. As you can see, you can use moving averages to help show whether a pair is trending up or down.
By combining this with your knowledge of trend lines, this can help you decide whether to go long or short a currency pair. Just as long as lines are in order faster MA over slower MA in an uptrend, slower MA over faster MA in a downtrend , then you can tell whether the pair is in an uptrend or in a downtrend.
Always do your best. What you plant now, you will harvest later. There are many ways in which to use moving averages, but the three methods below are my personal favorite. One thing to keep in mind as we move through the lesson, is that a moving average or moving average combination should never be used alone. Because it is a lagging indicator, the moving average should always be used in combination with other price action patterns and signals to help put the odds in your favor.
The use of moving averages for trend analysis is arguably the most common use of the indicator. There are many variations of moving averages that a trader may use to analyze a trend, but my favorite combination is the 10 EMA and 20 EMA. Nor is it something you want to rely on by itself. However when used properly, these two moving averages can make identifying a trend much easier. On the flip side, when the 10 EMA is below the 20 EMA, we only want to be looking for selling opportunities as this often represents a downtrend.
These two moving averages can also be used as dynamic support and resistance. There are several moving averages which carry more weight than others in the market, and the 10 and 20 period moving averages are among them. Because the periods above are commonly used, the market tends to respect them more than others. This type of dynamic resistance combined with a price action sell signal can be a powerful combination.
Last but not least is using moving averages to help determine if a market is overextended. One of the more common pitfalls among Forex traders is buying or selling too late. We want to avoid entering a market that has overextended itself, and moving averages can help us determine if this is the case. Simply put, all markets normalize after an extended move up or down. This may come in the form of sideways price action or even a retracement.
By using the 10 and 20 EMA we can stay away from trying to join the trend too late. It should be noted that this method goes hand in hand with using moving averages as dynamic support and resistance. As price action traders, we want to avoid entering a market that has made an extended move away from our moving averages.
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