Many new traders struggle to make a profit from the Forex market. At first, they study a trading strategy. After trying they make huge losses and they leave the market intentionally. The main reason for leaving the market is that they don’t include the trend in their forex trading strategy that works. The trend is an important part of technical analysis that most Forex traders should know. The Forex market or the foreign exchange market is a unique place to buy or sell currency pairs.
Moreover, it is the world’s largest financial market. There are more than 6 trillion dollars of transactions that happen every day in the Forex market. Therefore, the Forex market is considered the world’s most liquid financial market. Most of the market here are the central banks, hedge funds, insurance companies, multinational companies, and Forex brokers.
What is the benefit of having a lot of liquidity in the market?
Sufficient liquid means there is a possibility that the movement might anticipate the price action. As a result, the technical analysis works well in the forex market compared to the other financial market. If you want to find the market using moving averages you will be able to predict accurately in the forex market compared to the other market.
So we can say the moving average works well in the financial market.
Therefore, analyzed and financial institutes use the moving average as an important tool to predict the trend.
Moving Average in Forex Market
The moving average is a trading indicator that represents the average movement of price in a certain period of time. You can use a moving average from one minute to one month chart to see the previous history movement.
For example, the 200-moving average represents the average price of the last 200 hours or 200 days.
There are many types of moving averages. However, all of them are used from the same concept but there are certain changes in the calculation of different moving averages. The simple moving average and the exponential moving average are the world’s most used moving averages.
There are other types of moving averages, these two are used by lots of professional traders therefore we will stick to these.
Let’s have a look at the details of the two moving averages.
- Simple moving average: Simple moving average represents the arithmetic meaning of a financial instrument over a number of periods.
- Exponential moving average: it is a complex measurement of the moving average. In order to calculate the exponential moving average you first need to calculate the moving average and then multiply it with the weighting average.
Moving Average as Trend Identifier
As we know moving average represents the average price of the last number of candles we can use as a future price direction.
As we know the average price that leaves the level of buyers and sellers and each shows potential indications about what the price may head to in the coming days.
In a bullish market, the scenario is the price remains above the moving average which means by controlling the market and they are willing to take the price higher.
On the other hand, if the price of mobiles is below the moving average for a long time it was Elsa dominating the market and they might be willing to move the market down. for example, if the price remains below the 20-day moving average it means the price was controlled by the seller for the last 20 days, which is an indication that the price will be dominated by the seller in the coming days as before.
Forex market trade using the moving average by following steps:
#1 Identify the Macro Look
The forex market is consistent with traders who have millions of dollars as their investment.
Therefore they have the power to move the price on either side. Institutional traders often use higher time trains as attentiveness represents the highest accuracy of a price movement. Therefore, a longer time frame indicates better accuracy of the price movement. We can use the 200 moving average as it works well to identify the trend.
Enterprise status is about the 200 daily moving average you can consider the buyers are controlling the price and we will focus on buying only.
On the other hand, if the price of mobiles is below the 200 daily moving average power in tension would be to the selling site only as sailors with the huge money are controlling the price.
#2 Measure Short-term Trend
Later on, we will focus on the short-term trade to match the short-term direction with the long-term train that we found earlier. If we can match the short-term direction and long-term direction on one side we can have a better accuracy trading result. As short-term trading is related to the recent price we can use a moving average that focuses on the most recent price action.
So for measuring the short-term trend we will use 20 daily moving averages. At first, you need to see the price below the 200 daily moving average to identify the major direction and then look at the 20 daily moving average heading. T20 daily moving average is also considered a dynamic level of support and resistance that moves with the price.
Therefore if the price gives some correction against the 200 daily moving average and results from the 20 daily moving average would be a good trading opportunity. So there is a reversal that might be happening with a price action candle of the pin bar, inside the bar or two-bar rejection.
If you want to take your trade using a candlestick pattern or with indicators, you should consider the selling side on.
#3 Combination Of Trend
You can combine what the 200 moving average and 20 days moving average are doing. If the price is below both of the candles your intention should be the sale.
For example, you can add RSI and Bollinger bands besides the 200 moving average and 20 daily moving average also shows the selling trend, it is likely that your possibility to hit the take profit will increase. For taking entry you can follow your trading strategy and you can match them with the current market trend.
On the other hand, if the price is above the 200-days moving average your intention is to buy only.
As the Forex market is the most liquid financial market in the world a moving average is a powerful tool to indicate the market trend and it works well compared to the other trade trading indicators.
Identification of a trend is a very important element for a trader that most of the new traders travel. The important thing is that your all-trading strategy will pay off if you cannot identify the trend properly.
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