How to Use Moving Averages in Forex Trading Analysis

In Forex trading, the moving average is used to determine the trend of currency prices in the market.

In the simplest form, a simple moving average is plotted on the Forex trading chart to show the trend.

When the price is moving up, the simple moving average will stay below the price action – Uptrend.

using moving average in forex trading

If the price is moving down, the simple moving average will be above the price action – Downtrend.

In this case, you buy the market when the price closes above the trend line and sell when the price closes below the trend line.

However, the market does not always obey the law. What you think could be a reversal might be just a short sentiment, and the trend would possibly reverse.

Say, for example, you wanted to analyze the USD/JPY chart below.

false signal in moving average forex trading

Because the green candlestick has closed above the simple moving average, signaling that the price movement could be reversing to an upward trend, you decide to buy.

Then boom…the next candlestick closes below the simple moving average. Just a fake signal. You lose!

One of the ways to avoid fake signals is to plot several moving averages. This gives you clearer signal of the price trends.

If the prices are trending upwards, the faster moving average will be above the slower moving averages

If there is a downtrend, the faster moving averages will be below the slower moving averages

Thus, you can buy as long as the faster moving averages stay above the slower moving averages and vice versa.

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