Introduction

      The first technical tool which we will review and study is the Moving Average (MA), which is widely used amongst trend traders. Using Moving Averages is a great way to get more information about the „Big Picture” with leaving the noise of the market behind, no wonder, it's really popular. Easy to use, easy to integrate to any trading system.

      IMPORTANT! Every tool of this strategy can be combined, which means you don't have to use all the tools while trading. It's always up to the market situation, sometimes I attach a moving average to see a little bit behind the chart then I remove it, sometimes I leave it on chart. Sometimes I use trendlines, but nor MA's. Certainly, you can also modify the strategy I am introducing and intergrate additional tools, but before doing that don't forget that (just like with this strategy) BACK and FORWARD tests must be done!

What is a moving average?

       Moving Averages work in a quite simple way - measure the average price of a currency pair over a specific timeframe. Moving Averages are generally used to define areas where the pair could reverse and smoothing out price, volume fluctuations, noise. Take it as an dynamic Support & Resistance.

USDCHF D1 chart with EMA's. A beautiful example.

      MA's are often used on D1 charts, but in this strategy its often used from M15 to D1 aswell. That's why with this strategy we use MA's only for trend verification and not for signals!

Just like with other indicators, the longer the timeframe, the more reliable the indicator. In shorter timeframes indicator react to movements a way faster, which leads to more signals, which cause more false signals. So, remember: only for trend determination.

Types of MA's

      Fortunately trading terminals automatically calculate MA's so we don't have to deal with different math formulas. There are three types of Moving Averages (in-order-popularity):

SMA (Simple)

EMA (Exponential)

WMA (Weighted)

In this strategy we use EMA's. Most common periods are 50, 100, 150, 200, 365.

A historical GOLD H1 chart. Precedent.

The „dark side”

      It isn't all romantic. In a trending market MA's beautifully shows you the situation without showing ”noise”, but in a ranging markets it beautifully does NOT. That's why we use MA's – to determine how strong, and healthy the trend, or it's just ranging.

Sideways market. A mess. We are waiting for a clear picture.

See? Moving Averages are getting closer and closer, then cross and continue and continue... Sideways market, which means NO trading. We want to see these lines in order, nicely, far away from the price and then we will be able to trade our strategy.

(Written by Stockwalker, 14^th of June 2011)