Forex traders are a curious bunch, and their intellectual curiosity extends to experimentation with just about every technical indicator created. The journey many FX traders go on to try and discover a magic combination of indicators that will unlock rewards and riches often gets called the “search for the Holy Grail”. It’s a reference to looking for a trading system and strategy that works 100% of the time, despite no such system existing.
Traders shouldn’t resist this creative stage of their trading evolution; it’s a natural form of progression. Experimenting with all the technical indicators helps you to develop a deeper understanding of forex trading and the industry. They’ll try to blend a combination of fundamental analysis with their technical analysis to build their trading edge.
Sometimes the charts of novice and intermediate level traders take on the look of a Jackson Pollock piece of art; there are so many lines, colours and detail on the time frame as a canvas, you’d need an art expert to explain the pattern and not an analyst.
FX traders will also experiment with time frames, and trading various sectors such as equity indices, stocks, commodities and cryptocurrencies as well as FX. At some stage during this journey of discovery, traders begin another leg of their journey; they start a slow process to strip down their charts to a bare minimum. This process can take years, but it appears to be a process that many experienced and successful forex traders acknowledge.
After stripping back their charts to a vanilla appearance, they begin to concentrate on using highly selective indicators or a single indicator to identify price-action. They may use a moving average or a single technical indicator (TI) only to trade the markets.
There are many popular TIs to choose from, such as the MACD, DMI, PSAR, ATR, stochastics, Bollinger Bands (BB) etc. Individual traders might try to use a combination of two or more to get a trading signal. A momentum oscillator combined with a volatility and trend indicator is a popular choice, perhaps the MACD (oscillator) BB (volatility) and the ATR (range). When the three align, the trader will execute their order. If one series aligns, they’ll go long, the other direction and they’ll go short.
Other traders might view this as over-complication and overkill. They’ll suggest using just the one TI, perhaps only the MACD which is two moving averages with a signal generated when the MAs cross or converge. The next logical conclusion is only to use one moving average, and it’s this concept where we want to focus.
A simple moving average often referred to as an SMA, can be a handy tool to gauge what direction the market is moving in. If left on its standard-setting and not adjusted to curve fit the recent trading periods and results, an SMA can translate and illustrate trends, divergence, and price action.
The MA gets used in conjunction with the price of a security. When for example a 14-day moving average rises above the price, traders might consider this as a signal to go long and vice versa if the MA falls below the price. It’s also important to decide which time frame and trading strategy are most likely to deliver the information which will prompt you to act.
Many indicators, including moving averages, might be new to novice traders, but they pre-date the internet and online trading. The creators designed them to trade on weekly or monthly charts, specifically for commodities or stocks. But that doesn’t make them redundant for lower time frames or other securities like FX currency pairs, on the contrary, maths is maths, and the purity of design ensures they’re mathematically perfect and very potent. So, if you’ve become disillusioned with your current strategy, or you reckon you need to strip back to simplicity where you try and identify price action using the most basic but useful tools, then why not turn to MAs as your starting point?