Moving averages have several uses when it comes to forex trading. Although many trade experts count it as a less reliable parameter for trading. In reality, it can help the traders so much if some mistakes are avoided and smart moves are made.
Is there a best moving average?
Many traders try to find the best moving average, whether the exponential moving average or simple moving average. Similarly, traders think a 50 period moving average is better than a 20 period MA. BUT it varies from one market to another. For example, in a case study of one market, a 20 MA might seem like a winner, but if you evaluate another market, you conclude that it respects the 200 MA. So always pay attention to the price structure first, then only you can use the appropriate moving average. For example, if you see a market in a strong trend, you want to use the 20-period moving average because it’s more responsive. But always look at the price structure since the market trend is not static.
Be careful with moving average crossovers
Don’t use moving average crossovers to time your entries. Because moving averages are not a reliable indicator, the crossover technique might not capture exact tops and bottoms. But it can still help you identify the trend. What some of the traders do is that they tend to close out their position once a new crossover has been created or once the price has significantly moved against their positions. Traders have to consider things like where to place the stop loss or when to take the profits. The best approach is to use the price section of the market as it is a reliable method.
Pay close attention to the value area
Don’t trade far away from an area of value. The Value Area is a wide range of prices where most trading volume has taken place on the prior trading day. Usually, when the price is above or below the Value Area, there is a high chance that it would most likely come back to the balance area. Similarly, when traders open trades for either selling or buying, they should consider the important fact that the price that leaves the value area would definitely come back to it with a high degree of probability. If we are trading far away from the value area, there is a high chance of pullback by the market resulting in losses. The moving average can help you define an area of value and make sure not to go far from it to get the maximum benefits of trading.
Too many moving averages
Don’t use too many moving averages. People want to structure their trade, and thus they can use up to 10-15 moving averages which are not recommended at all. It tends to overcomplicate things, and statistically, you need only one or two moving averages.
Changing moving averages Don’t change moving averages too often. Though we can adjust the settings too often, we can change the duration and whether it’s on the open high close. We can also displace the moving averages, so there are so many permutations, but the advice is not to change it more frequently. Just stick to one and see how it works before changing because if you use too many moving averages all at once, then chances are that you might fail and overcomplicate things.