How to Use Moving Average to Trade Currencies
There are many reasons why Forex traders opt for moving average when trading currencies, and they do so in many different ways. In fact, there are many ways a Forex trader can utilize a moving average. For one, any shrewd Forex trader will try to verify the wisdom of his or her investments before committing to them, and a sound moving average could reassure them that they’ve made a sound investment or turn them away from a risky venture, or at least make them reconsider. However, some Forex traders rely on moving averages so much, that they have incorporated them into their trading strategies, going as far as building their entire strategy around moving averages, seeing them as the most objective foundation for such a thing.
What is a Crossover?
A crossover is the point on a chart where currency (or some other financial instrument that your regulated Forex broker lists) and indicator intersect, and the reason for its popularity is the fact crossovers can be used to predict future price movements. They typically occur when the momentum shifts, and that exact point is the sweet spot for entry and exit strategy alike. It is a perfect moment to jump on the wagon and capitalize on a trend, or the perfect moment to step off just before the whole thing runs off the cliff. The moving average shows how the price change is supposed to happen, rather than how it actually takes place; the difference between the two is where the real money is made, or lost, depending on how you chose to trade.
There are several types of crossovers. The most common type occurs when it moves from one side of the moving average to the other, which is a relatively normal occurrence. However, when a short-term average crosses with the long-term counterpart, this usually means something big is about to happen. The rule of thumb is: if the short-term average goes above the long-term, you buy like crazy, but if the short-term average drops below the long-term, sell and sell fast. As far as signals go, this is about as objective as it gets, which is why it is so popular. Although, some may describe it as a self-fulfilling prophecy, because if it indicates something and everyone acts accordingly, it will inevitably come true, regardless of other circumstances.
Average: The more, the merrier
Many Forex and Bitcoin traders believe you can’t have too much of a good thing, so some of them tend to overdo things with moving averages. They rack up the number of moving averages until their charts are filled with moving average ribbons, comprised of different moving averages on the same chart. While this may seem excessive, their crossovers are among the most accurate indicators of trends in any market. The more of them move as one, the stronger the trend, and vice versa. But you might want to play it safe, so make sure the trend ‘strays’ about 10% from the average, just in case.