MoneyMakingForex.com

Forex - Trading Moving Averages

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Trade The Cross?

Do moving averages work in forex? That's a strange question, you know. It's kind of like asking, "Is that woman beautiful?" The answer is neither yes or no, but rather, it depends.

One common way to trade with MAs (Moving (Averages) is to put a short one and a long one on the chart (e.g. a 5 period MA and a 13 period MA). Everyone who has been trading more than five minutes knows the set up. When the fast MA crosses up through the slow one, you go long. When the fast one goes down through the slow one, you go short. The picture is an example of a short signal.

The ultimate proof is in computer backtesting. Many people (myself included) have written programs to test MA crosses. They are losers. Trading MA crosses doesn't work by itself. If you're really interest in them (perhaps they really fascinate you), you need to add a filter to help you determine when a trend is strong enough to enter on a cross. Perhaps you could use the ADX indicator. Anyway, carrying on…

Trade The Pullback

A better way to trade with MAs is to use them to help you see pullbacks. You've seen in the market; it thrusts and then pulls back before thrusting again. If you get in on that pullback, you stand to have a good trade.

Here's how to use the moving average to help you do just that. Pull up a chart of your favorite currency. Pick your favorite timeframe. Got it? Good.

Here is the subjective part. Put a moving average on that acts as support when the market is going up and resistance when the market is going down. Start with a 20 period MA and adjust from there. The average is too short if it's in the price bars. It should be under it in uptrends and on top of the price in a downtrend.

Now, how to trade it. In an uptrend when the market pulls back and touches the MA, that is your signal to go long. Trail your stoploss up to get out before the price turns on you. See the picture for an example.

Trend Identification

I don't if you can tell, I really don't think the ways mentioned above are the best way to use moving averages. The second method is far better than the first, but there is an even better way to use them.

What is it? Trend identification. In other words, which way is the price moving? I can hear some of you protesting already. "But moving averages lag. The trend has changed directions long ago and it takes forever for the MA to catch up!"

Really. You want an indicator that has no lag? Big news. It doesn't exist. ALL indicators lag. You want an indicator that perfectly picks tops and bottoms? It doesn't exist. Furthermore, supposing it did, you'd never hear about it.

So, MAs are good or determining trend direction. Then what? I personally like the whole concept of entering on a pullback. As far as I'm concerned, Fibonacci is as good as any other tool for calculating price retracements.