In forex trading, there are so many components and series of data that must be considered to see and predict currency price trends. Of course this is very useful for you to be able to determine the right trading steps and make a profit. One of them that you should be aware of is the Moving Average Indicator.

Not only useful as a guideline, but the forex moving average indicator can also be used as a strategy to make a profit. Here is a complete review.

What is Moving Average Indicator?

When you first enter the world of forex, you will see a line that describes the price movement of a currency. This line is called the moving average indicator. This technical indicator is considered the simplest and easiest to use as a tool for analyzing price fluctuations or exchange rates of a currency pair.

Please note that the moving average indicator follows the trend and contains prices that have been set. If you set this indicator with a long period of time, its movement will slow down. The moving average indicator itself contains data based on the average value of the highest and lowest prices, the opening and closing prices of transactions, and the middle price (median) of a currency pair.

By looking at the moving average indicator, you can analyze forex market trends even faster. When the price is below the indicator line, it means a decline or what is commonly called bearish. Meanwhile, if the price is above the indicator line range, then there is an increase in price or known as bullish.

The line on the moving average indicator acts as support when price movements occur above the line. Likewise, the Moving Average Indicator line acts as resistance when price movements occur below the line. From observing price movements with the moving average indicator as a benchmark, you can also determine the right time to buy or sell. Pay attention to the meeting point of the two currency pair lines.

The right time to make a purchase is when the line on the low-period indicator moves up across the higher-period line. When the indicator line on the short period meets the high-period line from top to bottom, then this is the right time to sell.

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Types of Moving Average Indicators

Before finally understanding the strategy of using moving average indicators in forex trading to widen profit opportunities, you need to know more about the types of moving average indicators that exist in the forex world. Each type has different characteristics and ways of working, so you can adjust it to your personal preferences.

  • Simple Moving Average

This type is the most popular and frequently used. As the name implies, its use is very easy. The data obtained from the Simple Moving Average is by accumulating the total currency price during one period, then divided by the number of time periods.

Simple Moving Average for a period of 200 days or called SMA-200 Day is an example used as a reference by many traders, even by well-known banks. This is because of its ability to show significant price fluctuations in long-term trends.

  • Exponential Moving Average

Unlike the Simple Moving Average, this type of indicator is considered more relevant if you want to see the latest price movements because of its responsive nature. The calculation method is a little more complicated, namely by calculating the Simple Moving Average Indicator and adding a multiplier.

The way to calculate the multiplier is with the formula [2/(number of periods + 1)]. For example, the multiplier of the EMA-20 Day is 9.52%, based on the calculation results with the formula. This indicates that the multiplier of the short-period Exponential Moving Average will always be greater when compared to the longer-period Exponential Moving Average.

  • Linear Weighted Moving Average

If the Simple Moving Average is usually used as a guideline to determine the support or resistance of a currency pair and the Exponential Moving Average is used to see the crossover of the currency pair price, then the Linear Weighted Moving Average appears as an alternative choice for you.

This indicator can be used to determine the development of market trends. The way it works is also quite complicated, adding up all the closing prices of transactions, then multiplying them by the data points on the line, and finally dividing them by the number of specified periods.

When compared to the two previous indicators, it can be concluded that the Linear Weighted Moving Average moves as fast as the Exponential Moving Average, where the Simple Moving Average is proven to be the least responsive line.

How to Use Moving Average Indicator

Knowing the capabilities, advantages, and how each type of forex moving average indicator works is very useful for every trader. Because, this knowledge can be used to form a profitable forex trading strategy. You don't need to bother racking your brain to find a new strategy, here is a summary of three strategies using moving average indicators that you can rely on.

  • Filter Trends

To optimize this strategy, you need to install a momentum indicator to determine the right entry time. One recommended momentum indicator that you can use is the Commodity Channel Index (CCI). Pay attention to the direction of price movement with the moving average indicator.

When the price moves up past the trend line, then you can prepare to open a buy position. If the price moves down below the curve, you can immediately sell. Use CCI to determine when to buy and sell. For example, if CCI touches a point above -100, it is certain that it is the right moment to make a purchase.

  • Open Position

If you are in doubt about when to open a position, the easiest way to determine it is with this strategy. Try to look at the price chart and the Moving Average line, focus on the intersection of the two. If the line is in line with the current price trend, then this is your chance to open a position. However, if it turns out to be not in line, you should use the 3rd strategy.

  • Crossover Identification

Using moving average indicators to identify crossovers is the most frequently used strategy by traders in the forex world. Generally, they use a combination of indicators such as SMA-20 Day with SMA-50 Day, SMA-20 Day with SMA-200 Day, or the most popular SMA-50 Day with SMA-200 Day. There are two terms in this strategy, namely death cross and golden cross. Death cross occurs when the 50-period line moves down across the 200-period line.

This indicates a decline in the price trend to bearish. While the golden cross occurs when the 50-period line meets and crosses the 20-period line, indicating that the price trend is rising again to bullish. From these two signals, you can determine when to sell and buy more accurately. Immediately make a purchase (buy) when a golden cross occurs and make a sale (sell) when a death cross occurs.

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