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Forex Using Moving Averages

Aug 17, 2007
What follows is the basis of a system for forex trading based on using moving averages in order to find "price gaps" in the market.

A moving average takes the average price at some stage in an individual time period, such as the close of the candle. In essence the effect of plotting a moving average is a "smoothing" of price information over time.

Traders can take moving averages over different time periods. In fact, moving averages can prove to be accurate lines of support and resistance. So for example, using moving averages set at exponential and for example only, 15, 30, 60, 90, 150, 230 as time periods, we have half of a technical system in place.

How? The answer to that is if we look over 4 timeframes - take for example the 1 minute, 5 minute, 15 minute and 1 hour charts, you will notice there are times where the price moves outside all of these moving averages.

It is at these times we can look to trade. When the price is above all the moving averages, we will be thinking to go long and when below, to go short.

The shortest term moving averages may provide the first lines of support or resistance in the opposite direction of the trade. Knowing that the price is above or below the moving averages is not enough however.

We need to factor in other elements. In this case, keep it simple, but not stupid. Find out where the news is coming from. You can get this information from a good finance site with times of major and minor announcements.

Simply don't trade at these times due to the impossible nature of predicting economic figures.
With the fundamentals almost out of the way with the above solution, we can build on our technicals.

You may wish to join a service which provides daily charts with analytics on them (in terms of potentially strong buy or sell levels) - see resources at the end of this article.

With regard to the technical side of our system here, we now need some idea of support and resistance which is more dynamic and preferable updating on your charts.

A good fibonacci indicator or pivot calculator is required for these purposes. Fibonacci is a mathematical formula for calculating key areas of support and resistance based on a market move and potential areas for retracement after correction.

We also, most importantly need to know the current momentum and trend direction. This could be more of a challenge. Very basic indicators that could do this for us would be a MACD and an RSI to name a couple.

However, either a subscribed service or more recent indicator would be recommended. You therefore would only take the trade if the price is above or below, if, and it's a big if, the following factors are also on your side:

= there is no news coming out in the vicinity of placing the trade

= the trend is is the same direction as you want to trade, whether that's using 4 hourly, daily or short term charts, that's up to you and your appetite and descretion

= there is still enough momentum and strength for the move to continue in the same direction & there is not overbought or oversold signalled

Can you see how this system has been put together? We start with a basic idea - the use of moving averages to bring out key areas of support and resistance around the price.

We use fundamental knowledge (ie news announcements) to stay out at news time. We have some further idea on our chart where support levels and resistance levels may be using Fibonacci.

Off the chart proper, but still indicators, we need some kind of way to determine trend and momentum. We can then base our decision, not on a blind gamble, but on the reflection shown by our indicators and system as to the direction and likelihood the price action is going to take place in our favour.
About the Author
Sam Beatson lives with his wife and 2 daughters in Sheffield, UK and enjoys daytrading, running, walking and swimming. He owns www.fasttrackforex.com the Forex training crash course. Click here to visit.
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