Is it advisable to use moving averages in fx exchange trading?
In this article we take a look at the use of moving averages in fx exchange trading
Moving averages are one of the most used indicators in the fx exchange trading world. Many traders use the tool all over the world and this is why it is respected well in most trading circles. There are many types of moving averages and each of them is used in different ways depending on the trader. For example, while intraday traders would prefer to use the exponential moving averages while the swing traders would prefer to use the simple moving averages
What are the advantages of using moving averages in fx exchange trading?
- Moving averages are extremely useful in sniffing out the change in trends at any given time. The speed of the change reflection is dependent on the settings used by the trader but it is still very efficient in this regard.
- Moving averages help traders to stay for as long as possible in a trend. There are numerous cases where trades entered using a moving average signal went on to run for weeks netting the trader as much as 2000pips on one trade! Other indicators would have signalled a direction change but a moving average setup will filter all the smaller moves thereby keeping the trader in the long term trend.
- Moving averages are mostly very easy to setup and understand. This explains why it is one of the most popular trading indicators out there
Are there any disadvantages in using moving averages?
- The main disadvantage in using moving averages is that they cannot be used for trading lower time frames effectively. In fact, most ardent users of moving averages do not use it below the 4hour timeframe. This is why people who start out with using the moving average on smaller timeframes end up dumping it after a few trades.
- Trading with moving averages in the fx exchange market involves using fairly large stops as adequate room must be given for the ebbs and flows of the market. This makes it a no go area for people who do not have much funds.
Is it advisable to trade with moving averages alone?
While it is a good idea to use moving averages especially as a long term trader, it is not a good idea to use it as a standalone. The biggest traders who use moving averages still keep an eye on support and resistance levels and they equally do not ignore fundamental releases.
What are the best moving average combinations to use?
This depends on what your trading style is but there are two main ways you can use moving averages.
- The first is by setting up one slow and one fast EMA (10 and 20 is the most popular) and then take trades as soon as they cross each other. When you get an opposite cross you can exit the trade and join in the new direction.
- The second method is by taking buy trades as soon as soon as a daily candle closes above the 100SMA and then hold the trade until price goes below the 100SMA again at which point you can take a sell trade.
The moving average is a very useful indicator. You only need to find out what works best for you.