Strategy That Works Every Time
A trader can develop a simple Forex strategy that works every time when they want to profit from low-risk but highly rewarding trading opportunities, by using just a few moving averages (MA).
These are quite possibly the most commonly used technical indicators in the Forex trading market. Moving averages are primarily used as trend indicators and can also identify support/resistance levels. In currency trading, the 50 day, 100 day and the 200 day moving averages are used to determine significant levels of resistance or support. There are two moving averages that are most frequently used in Forex – the simple moving average (SMA), which is a representation of the average price spanning a particular time period, and the exponential moving average (EMA), which represents the weight of recent prices.
Why the SMA Strategy Is So Popular
Moving averages are simple-to-use and highly effective indicators that help traders to recognize when the market is trending, ranging or when there is a corrective environment, so that the trader is in a better position to take advantage of potentially profitable positions.
Normally, the use of more than one moving average is a Forex strategy that works every time, since two moving averages are often trend triggers. In other words, if a shorter moving average happens to cross above its slower moving counterpart, it represents a buy signal until the MAs reverse or the trader hits their profit target.
However, all this comes with a word of warning: the best strategy is to stick to using just a few specific moving averages. This will stop you from trying to look for a ‘perfect’ moving average and maintain your objectivity with regard to market movements.
Who Uses the SMA Forex Strategy?
Often, moving averages are the first indicator which new Forex traders are encouraged to make use of, and there is a good reason for this. They not only help traders to define trends, but also provide potential entry points in the direction of the trend. MAs are also of great importance to more advanced traders, such as investment banks and fund managers, as they analyze the markets looking for price trends or potential reversals.
MAs are also a simple tool that is often used to define support and resistance levels in the Forex market. Whenever a market is strongly trending, any bounce made off a moving average can signify an opportunity to join in on the trend until the price closes below the moving average. However, if the price keeps moving above and below a moving average within a short time period, the market is in a range, with the reversals being less significant from a trading standpoint.
Trading with Moving Averages
Moving averages have many uses, but a simple Forex strategy that works every time is to find a moving average cross-over. A moving average cross over occurs when the faster moving average (shorter) crosses above the already rising slower moving (longer) moving average – this is a buy signal. Using the same strategy, a sell signal is generated when the faster moving average goes below a falling slower moving average.
In a strategy that uses moving averages, your ability to control your downside risk is a key factor in your ultimate success. It is vital to differentiate between a trending market that has clean MA signals from one that is ranging, which has more noise than signals. By getting comfortable with a particular set of moving averages, it is easy for you to analyze the Forex market objectively and to trade profitably every week.
With hundreds of strategies out there, you will be hard pressed to find one that is as easy to use and effective as that based on moving averages. Many of the world’s leading traders agree that it is a Forex strategy that works every time.