Moving averages and their uses in forex trading strategy part 2

One person uses the simple moving average, another one prefers an exponential moving average however both of the indicators are quite potent in predicting market movements and can also be used to frame the successful trading strategies. 

 Moving averages are frequently used to show the price support level. Even new investors are able to notice that when the falling price reaches the level of an important average it stops its fall and starts in the reverse direction. So, a very potent way to predict a trend reversal is to see if the price reaches the level of an important moving average like the 50 day or 100 day MA at which point there is a strong likelihood of a trend reversal. 

 Similarly moving averages are also used to determine the resistance levels. Usually traders observe that when the price falls below an important moving average level it becomes very difficult for traders to push it above this resistance level. This information can be used in two ways: you can either use the resistance level as your entry point because the price will usually drop below this level. Or you can also use this point to liquidate a long position. This means that if you are holding an investment that goes through the resistance level the value of your investment may deteriorate if you choose to hold the investments. 

 This quality of the moving averages to form support and resistance levels can also be exploited for risk management by using them to set stop-loss orders. This ability helps traders to minimize their losses by getting out of the trade before it gets too worst. If the price crosses a resistance level you know that the price will drop further which means that the resistance level is a good place to set the stop loss order this way if the price reaches the resistance level the long position will be liquidated before the prices drop any further. 

 Moving averages are used by traders in different contexts some use them as the primary analytical tool while some traders are happy using them in conjunction with other tools to improve the viability of their decision. However, moving averages can also be used to frame trading strategies. Here are a few common ones. 

 Moving average lines are often used as filters. Trader places the stop loss order at a certain point beyond the MA line for instance 10% above the average line. This helps in minimizing the losses that the trader may incur due to market noise. Also if the trend can reach the designated filter point one can usually be confident about its veracity. But there is also a downside in filter using: you may feel you have lost on some amount of profit because you waited too long to enter or exit. However with time you will get better at choosing the filter points since there are no set rules to it. Using filters certainly helps to minimize the false signals. 

 Most traders will vouch by the crossover strategy. The basic crossover involves the movement of the price from one side of the MA line to the other. This movement is usually an indication of a shift in momentum and is used as a basic entry or exit point. For instance if the price moves from below the MA line crosses it and moves above, it may signal the start of an uptrend. On the other hand when the price moves from above the MA line to below the MA line it signals the start of a downtrend. Another type of crossover is the short-term and long term MA crossover. When these two lines cross it is an indication of a shift in momentum and it gives the signals of an impending strong move. As a rule when the short term MA line crosses above the long term MA line it as an indication to buy while a short term line that crosses below the long term MA line it is an indication to sell. 

 If you wish to increase the viability of your decision you can use a number of MA lines for instance many traders will plot the 5, 10, 20, 50, 100, 200 day MA lines on the same chart this technique is called the moving average ribbon. This increases the capacity of the indicators to predict the market movement with mote certainty and also helps to reduce the false signals. If all the moving averages move in the same direction, it is obvious that the trend is credible and strong.