For forex traders who are interested in trading only high probability trades, there is nothing more important than knowing the direction of the market. Unlike most other commodities, the forex market is moves very fast. Finding the trend is not easy. One of the tools we use to find the trend is forex moving averages.
Forex Moving averages are your friend. The best forex traders know that the best way to make money from trading forex is to be on the right side of the trend. In fact, you will spend the largest time in your forex trading career looking for the trend.
That is the reason every day, you will be told of new forex trading indicators and systems that will help you determine the trend.
Moving averages are simple to use and you do not have to reinvent the wheel while trading. It is best to spend your time to learn forex moving averages than buying new automated forex trading software every week. I believe moving averages are just the ultimate trend following forex indicators.
Please take the time to read a short introduction on how to learn forex moving averages.
The untold secret in the automated forex systems market is that very many of them rely on simple indicators such as moving averages. Of course, no one is about to tell you that their super system is a simple moving average crossover system.
How to Choose your Forex Moving Average
Deciding to learn or trade moving averages is the first step to forex trading success. The next step is to choose the moving averages (MA) to use.
You should understand that there are as many moving average trading systems as there are moving averages. The problem in finding the trend is not finding the perfect system, but FINDING THE MOVING AVERAGE THAT WORKS FOR YOU!
The basic rule in trading moving averages is that you should buy when currency commodity prices are higher than the moving average and sell when prices are below the currency price.
However, different period moving averages hug or follow prices in different ways.
Shorter moving averages will follow the price closer than longer moving averages. You will choose the moving averages to use depending on your trading goals and even your mental attitude.
Shorter moving averages will get you in and out of the forex market faster and more frequently than the longer moving averages. You are likely to enter into a new trend early when using a short moving average, but you are also likely to be whipsawed if the market is not trending.
The longer moving average keeps you longer in a trend but at the same time, you may exit a trade late or enter the new market late.
Trading with Multiple Forex Moving Averages
In order to try to avoid the shortcomings of trading using only one moving average, forex traders have adopted using multiple moving averages to make their trades.
Rather than buying or selling a currency based on whether price is above or below a moving average, most traders prefer to take their forex trading signals based on the cross between a number of short and long-term moving averages.
Trading multiple forex moving averages not only gives you entry signals to the market, but also confirms the validity and strength of the forex trend. If the trend is strong, the prices will stay above or below the multiple moving averages.
Let us take an example of one of the more profitable forex moving average crossover systems. It is the 10/20/100 EMA system. Try it, you may find that it works just great for you.
Anatomy of a Forex Moving Average System - 10/20/100 EMA Forex System
The basis of all trend following forex trading systems is to trade only trending markets and avoiding choppy markets. To do this forex traders will tend to use at least three moving averages to make their trading decisions.
Let us take an example of a forex trader who chooses to use three exponential moving averages. These are the 10 EMA, 20 EMA, and the 100 EMA on a 5 minute chart. The 10 EMA acts as the short term moving average, 20 EMA is the mid term moving average and the 100 EMA is the long term moving average.
Trade entry signals will occur when the 10 EMA crosses the 20 EMA. However to avoid too many trades and being whipsawed, both the 10 EMA and the 20 EMA must be in the same direction as the 100 EMA which acts as the main trend indicator.
Therefore, in the chart below, we have programmed a very simple moving average trend following system. The rules are simple
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