Are forex moving averages profitable to the forex trader? The short answer is YES! There has been a concerted effort by many automatic forex trading software sellers to ridicule the effectiveness of moving averages. In fact some go to great lengths to prove that forex moving averages do not work. Doing that unfortunately is not a very good idea.
When you are looking for high probability commodity forex online trading you must find the trend of the forex market. Granted the forex market trends for only a limited time, but using trend following forex indicators will keep you in the right direction most of the time. Even if you are a forex scalper, you should know where the market is trending so that you can know where to enter or exit a trade.
Some of the best forex trading systems whether automated or not are based on the KISS principle. “Keep it Simple, Stupid”. There is no simpler forex indicator than moving averages.
What do Forex Moving Averages Do?
Moving averages in their simplest forms tell you where the forex market trend is and the strength of the trend. If the moving average is going up, the trend is up, if the moving average is going down, the trend is down. It is that simple.
The major complaint is that moving averages are lagging indicators. That is true; they are not a crystal ball. This lagging factor can cause a trader to miss the start of a major move or the end of a long trend. However, their purpose is to tell you the direction of the higher probability forex trades.
Prices tend to remain in the direction of the major trend. As long as the market stays above the moving averages, then you are in an uptrend and should be buying the currency you are trading and vice versa if prices are below the moving average.
Types of Forex Moving Averages
There are eight popular types of forex moving averages:
- Simple Moving Averages
- Exponential Moving Averages,
- Time Series Moving Averages,
- Weighted Moving Averages,
- Variable Moving Averages,
- Triangular Moving Averages,
- Volume Adjusted Moving Averages, and
- Moving Average of a Moving Average (this is becoming a popular forex indicator)
You can learn more about these and other forex indicators at the forex dictionary.
The only significant difference between these moving averages is the weight that is assigned for to the most recent forex data. For example, simple moving averages (SMA) assign equal weight to the prices, while exponential moving averages (EMA) assigns more weight to the most recent prices.
Interpreting Forex Moving Averages
Whichever types of forex moving average you choose to trade with the basic interpretation of a moving average trade is to compare the relationship between the moving average and the price of the commodity forex security you are trading.
Buy the currency when the currency rises above the moving average. Sell the Currency when the price falls below the moving average.
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