Roy Cuzin - The Chart Wizard

Using the big moving averages to trade Forex

Hi, Roy Cuzin is here. Experimenting with technical analysis is a fascinating occupation, and an exercise in education which is essential for all novice traders to undertake. Unless novice traders completely absorb and involve themselves in the process of technical analysis then quite simply, their opinion on what works and what doesn't, can't truly be evaluated.

Eventually, as novice traders move through the gears of experimentation, they'll quickly discover what works and what doesn't. Having lit up their charts like Xmas trees, with so many confusing and replicating technical indicators, they'll begin an intriguing last leg on their journey of evolution. They'll begin to strip their trading charts and time frames, back to a very simple representation of how price action can be clearly observed and displayed. And there's absolutely no requirement to be embarrassed regarding this initial baptism. Becoming an amateur, retail trading, technical analysis 'expert', should be regarded with the same prestige as obtaining a degree, before you move onto gaining your masters and then your PhD. Obtaining that first expertise in technical analysis can take as long as a standard degree course; three years.

Many technical indicators are simply replications of each other, if you consider the various indicator groups, then you'll very quickly ascertain that most oversold/overbought indicators are similar, as are (for example), the key momentum and oscillating indicators. And many of our most popular indicators use moving averages as the key components of the complete indicator. For example; the MACD, the moving average, convergence, divergence. Which is in effect a composite indicator that shows when moving averages converge and when they diverge.

Moving averages are often discarded by novice traders, the initial belief is that trading has to be complicated; it can't possibly be so simple that you take your instructions and triggers to enter and exit, based on simple graphical lines. And yet what is "price action", how do we derive our instructions and motivation to take a market decision? Isn't it because we observe the market changing, which can we perfectly visualize, by using moving averages, just as efficiently as using other more complicated indicators?

Moving averages such as the 50 day, 100 day and 200 day in their simplest form (SMAs/simple moving averages) are (arguably) some of the most underrated and misunderstood indicators available. They deliver medium to long term information, on how our Forex markets are trending, often in a far better format than many other complicated indicators.

Technical Forex Traders

Many technical Forex traders will use these moving averages as aids when choosing to enter or exit a market positions, the belief is that large moving averages, such as; 100 and 200 SMAs can act as areas of support, or resistance once breached. The belief is that, for example, a breached 200 SMA will act as a significant sentiment psyche level.

Simple moving averages (SMAs) are also viewed as low risk areas to place orders. The logic is that such moving averages directly correlate to the average price all market participants have paid over a particular period of time.

For example, a 100 day moving average represents the average price that all investors have paid to obtain the asset over the past twenty trading weeks (5 trading days per week) making it a commonly referenced level. The 200-day moving average represents the average price paid for a currency pair over the past 40 weeks. This reading could suggest a relatively cheap price compared to the price paid over the past year. If the price then falls below this 200 SMA, it may be considered to be acting as resistance, because traders who have taken positions, may then consider closing such positions in order to ensure they don't suffer unnecessary losses.

Experimenting with the larger moving averages is simple. In closing, one suggestion would be to place 100 and 200 SMAs on daily time frames of the securities you intend to trade and retrospectively look for price action behavior when price reaches these larger MAs. Does price reject the levels, does price react in any way to these levels when back tested over a reasonable measure of time, perhaps a period of a year, which (when back testing using a daily time frame), is quite simple to evaluate?