What Is Indicator in Focus : Moving Averages and How to Use It?

One of the simplest indicators is the Moving Averages which have many variations and are used in different situations. Today, we will look at Moving Averages and how they can be helpful for us to identify trends and much more. They can also act as support and resistance in themselves and show us the direction in which a currency pair is moving.

Moving Averages

How is it constructed?

Moving averages, as the name suggests, are the averages of (usually) theclosingprices of the currency pair at any given time. The data points are then plottedonthe price chart as an Overlay. Vantage App allows setting the lookbackperiod, source, and other parameters according to your liking.

How are Trading Signals generated from Moving Averages?

Moving Averages are essentially a lagging indicator meaning they confirm the trend and the movement of a currency pair. They are not meant to predict the future movement of a pair but confirm a trend when it forms.

How to interpret Moving Averages?

The volatility of the moving average can be adjusted by adjusting the look back period or the number of time periods taken into account in calculating the moving average. If the price chart is above its moving average, then it tends to come back down to the level of the average price and when the price chart is below the moving average, it tends to inch up to the moving average line. As such the moving average can be understood as support (if the price is running above) or resistance (if the price is running below).

Entry Signal: BUY when the price action pulls back up after hitting the up trending Moving Average line or SHORT when the price action comes backdown after hitting a down-trending Moving Average line. 

Buy call Perfect Execution

Short call Perfect Execution

Exit Signal: Exit strategy involves Trailing Stop Loss which can take youout ofyour trade of the price reverses. Put Stoploss just below MAline, if youbought the currency pair and above MA line if you shorted the currency pair.

Strengths of Moving Averages:

They are flexible enough to work in both long-term and short-termtime frames. Moving averages are versatile and serve many functions as mentioned above. They identify simple trends. They are basic and easy to understand and implement.

Be Careful:

They are simple and there are advanced replacements available for them. They are a lagging indicator meaning they confirm trends and are not much capable of identifying reversals and confirm continuations. 

Disclaimer: 

The information published in the article is for educational purposes only.