Forex technical analysis indicators: how to use the moving average

Use the moving average to find the direction of the trend?

One of the functions of the moving average is to help traders determine the direction of the trend.

The easiest way is to draw a moving average in the graph. When the price tends to stay above the moving average, it shows that the price is trending upwards well.

If the price tends to stay below the moving average, it shows that the price is in a downward trend.

The problem here is that its use is oversimplified.

Let us look at the trend of USD/JPY. The exchange rate is already in a downward trend, but the release of a latest report caused the exchange rate to rise.

We can clearly see that the exchange rate broke through the moving average, so you think: “It looks like the exchange rate is about to turn, it is time to buy.”

You also follow your own ideas. So you buy USD/JPY and assert that the exchange rate will rise.

Unfortunately something happened and you were deceived by the illusion of the market. The results prove that traders only respond to news factors, and the exchange rate still maintains a downward trend and continues to fall.

The practice of some traders, and our suggestion, should be to draw several moving averages on the price chart, not just one. This gives a clearer signal. Let us explain.

In the upward trend, the short-term moving average should remain below the long-term moving average, while the downward trend is the opposite. For example, we have two moving averages, 10SMA and 20SMA. In the graph, the trend will be like this:

The picture above is a daily chart of USD/JPY. In the upward trend, 10 SMA remained above 20 SMA. You can judge by moving average whether the price is in an upward trend or a downward trend. Combined with your knowledge of trend lines, this can help you decide whether to go long or short.

You can also use more moving averages in your graph. As long as the moving average system maintains an orderly arrangement, they can tell you whether the exchange rate is in an upward or downward trend.