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Using Moving Averages

Using Moving Averages

2010-07-08 19:47:00
Richard Krivo, Trading Instructor

Instructor’s Response:

You demonstrate a good understanding of how to use Moving Averages in trading...well done.
Moving Averages can be employed in trading in a variety of ways and you have chosen two of the more widely used applications. The two trades you circled on the chart are based on crossovers. The idea here is that as faster MAs crossover the slower MAs, at the point of the cross, a position can be taken in the direction of the cross. (Naturally trading in the direction of the trend, which you have done here, will offer higher probability entries.)
You are using the 10 EMA (Exponential Moving Average), 20 and 50 EMA’s on this historical Daily chart of the GBPUSD. The 10 EMA would be the “fastest” since it is based on a shorter time frame than the other two so it is more sensitive to changes in price and will move ahead of the other two.
Also, as the MAs cross one another and begin to fan out and move away from each other, that indicates that the move is gaining in momentum.
Another technique that you have employed here is using one of the MAs, the 50 in this case, as a resistance level. As price action has tested this resistance level several times and retreated each time, this was taken as an opportunity to short the pair again...good work.
chart 7 8 10

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