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The Use of Moving Averages

The Use of Moving Averages

Thomas Long, Course Instructor

After all, a 10-day Simple Moving Average is calculated by just taking the closing prices of the last 10 days, adding them together and dividing by 10.  We can then plot those daily numbers on the chart to smooth out the market movement and get a better feel for the mood of the market.  Many new traders run into problems as they use the market price crossing the Moving Average or a crossover of two Moving Averages to enter and exit the market.  Typically they find that their entry and exit are late and very often find themselves with a losing trade.  However, the use of Moving Averages can be of great
help in determining the direction of the trend or for showing possible support and resistance levels.  Here is a daily chart of the EUR/USD with a 200-day Simple Moving Average plotted on it.


We can see two things with the chart.  The first is how the market has a tendency to find support or resistance on a move to the Moving Average.  Those three points are noted by the circles on the chart.  So if we are buying pullbacks in uptrends or selling rallies in downtrends, the use of a Simple Moving Average can help us better time our entry.  We can also see the price activity that I have highlighted in the rectangle as a good example of how Moving Averages can be of great help in noting strong trending moves.  The EUR/USD was moving up, was above the 200-day Simple Moving Average and the Moving Average was also moving up.  When you have all three points working at the same time like the activity in the rectangle, you have a strong trending move.  We would want to buy in an uptrend and sell in a downtrend.  This simple technical indicator has a lot of value it today’s trading environment, but we just have to be sure we understand its strengths and weaknesses to better judge its effectiveness.  Good luck with your trading!

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.