Forex Trend Determination - Correct Order of Moving Averages

(Please click on the accompanying chart to enlarge. Chart courtesy of FX Solutions’ FX AccuCharts.)

I often get asked about different ways one may determine trending conditions, or lack thereof, in the forex market. There are many ways to do it, including trendlines, trend channels, linear regression, slopes of moving averages, the Average Directional Index indicator, simple visual estimation, and more.

One rather reliable method that I tend to use often is called the “correct order of moving averages.” For this technique, I usually use five different exponential moving averages (EMAs), although more or less may be used according to a particular forex trader’s experimentation. The periods of the moving averages may also be varied according to experimentation, but I will generally use the following five EMA periods: 10, 20, 30, 50, and 100. Many traders have been known to choose periods based upon Fibonacci numbers (for example: 5, 13, 34, 55, and 89). Extensive experimentation with the quantity and periods of moving averages helps tremendously in identifying a good set of multiple moving averages that works well for the market being traded.

Once the quantity and periods are identified, trend determination with multiple moving averages simply consists of seeing whether the EMAs are in the correct order at any given time. If the longest period EMA is on the bottom and progressively shorter period EMAs stacked above it, with the shortest period EMA on top, that can be considered the correct order for an uptrend. If the shortest period EMA is on the bottom and progressively longer period EMAs stacked above it, with the longest period EMA on top, that can be considered the correct order for a downtrend. Whether an uptrend or a downtrend is indicated, strategies can then be implemented to enter into trades in the direction of the trend. If the moving averages are NOT in correct order, that is an indication that there is NO directional trend. In this event, one might be well-advised to stay out of trading in that particular currency pair at that particular time, especially if one prefers to trade in the direction of the prevailing trend.