There are many trading strategies that work for trading forex and futures markets . One of the simplest and often the first that novices look at is the use of moving averages.
Moving averages can be used in several different ways such as:
- To smooth out the noise in the underlying data and hence provide the trader with a clearer indication of the general trend in prices
- To indicate overall trend of the market. A rising moving average is generally Bullish and a falling moving average is generally Bearish
- If price is above its moving average and the moving average is also rising then this is considered Bullish
- They can also be used as an overbought oversold indicators. Moving averages tend to act as a “magnet ” and prices are continually being drawn back to them. So if price becomes too overextended above or below its moving average then it is likely to pull back/retrace to the moving average in the near future
- They can often be used as support or resistance levels. If price is turned back by the moving average (bounces off) a few times then the moving average can be considered to be a support or resistance level that needs to be overcome before price can continue its move in one direction or another.
Often multiple moving averages of varying lengths are used together on the same chart – so called dual or triple moving average crossover systems. For a dual moving average systems you would have a shorter term average and a longer term average.
- It is considered Bullish when the shorter term average is above the longer term average and even more so if they are both rising.
- It is considered Bullish if the shorter term average is also pulling further away above the longer term average as this indicates increasing shorter term momentum – the market wants to go higher
They often form an integral part of successful trading strategies used by forex and futures traders.
Other trading indicators are often developed around moving averages such as MACD (moving average convergence divergence) or Bollinger Bands.
These are just some of the ways moving averages can be used to help you interpret the charts and make trading decisions. Next we will look at a few specific trading strategies based upon moving averages.