Moving average 200 forex

Learn Forex: Moving Averages.

Moving averages help forex traders make effective transactions by aiding them in evaluating the price history of a currency pair or related investment. More specifically, these averages make it easier for investors to interpret the price fluctuations of an asset by smoothing out their random movements.

Technical analysts have harnessed a wide range of indicators over time, but the moving average stands out due to it being simple, practical and useful. By using it, forex traders can identify the price trends, as well as the resistance and support, of the security in question.

What Is A Moving Average?

A moving average is a type of lagging indicator that accumulates past price points and then averages them to provide a technical analyst with a better sense of where a security went over a period of time. There are a handful of different moving averages, including the simple moving average (SMA) and the exponential moving average (EMA).

Calculating The SMA.

To calculate the SMA, one must start by gathering a security’s closing prices over a fixed number of trading sessions.

If a trader wants to determine the 20-day SMA of the EUR/USD, he can add up all the currency pair’s closing prices over the time and then divide by 20. Alternatively, figuring out the 200-day SMA of the same currency pair would require totalling its closing values during that time and then dividing that sum by 200.

Calculating The EMA.

Calculating the EMA is a bit more complicated, as this indicator gives greater weight to more recent values in order to reduce the effect of lag. To determine this moving average, a forex trader should begin by selecting a time period, for example 10 days, and then calculating its SMA.

Next, the investor should figure out the multiplier he will use to give the most recent data points greater emphasis. The size of this multiplier will depend on how long the EMA is.

To calculate the multiplier, one can use the following formula:

Multiplier = (2/(number of time periods) + 1) For a 10-day EMA: (2/(10 + 1)) = 0.1818 or 18.18% For a 20-day EMA: (2/(20 + 1)) = 0.0952 or 9.52%

Once this multiplier has been acquired, the following equation can be used to determine the EMA:

Multiplier x (closing price – EMA(previous day)) + EMA(previous day)

Harnessing Moving Averages.

Once a forex trader has calculated one or more moving averages for a security, he can use it for a wide range of purposes. Many investors utilise these indicators to determine what trend a security is following.

For example, a currency pair could follow an uptrend, or period of rising values, during a time frame. Most investors seek to identify these trends and then try to profit from them. Alternatively, a security may do the opposite and follow a downtrend over a period. When an investment behaves this way, it can create losses for any people or institutions owning it.

However, investors should keep in mind that whether a security is rising or falling in value, there are many different ways they can try to generate returns from either its rise or descent. For example, as long as assets are climbing in value, investors can simply buy them and obtain profits. They can also generate returns from depreciating securities through strategies such as shorting.

Using Different Time Periods.

It is worth noting that forex traders with different preferences may employ moving averages of varying length. For example, someone looking to invest over the long term may look at how a security performs over a time frame such as 200 trading days, as this will grant insight into how the financial instrument has performed in the long run.

Alternatively, an individual focusing on short-term trading might hone in on how a currency pair did during a 20-day window, as doing so will provide a sense of how the pair performed in this comparatively short time.

One more use of moving averages is measuring the momentum of a given security’s price, or how quickly it is either ascending or descending. The whole point of determining momentum is that once an asset starts moving in a certain direction, it will likely keep going the exact same way.

If a forex trader can identify the momentum of a security, he can buy or sell the asset, or even take out long or short positions on it. To single out this momentum, an investor can look at what the financial instrument did within the short, medium or long-term.

For example, if a forex trader wanted to ascertain the short-term momentum of the EUR/USD, he could look at either its 20-day SMA or EMA. If he instead desired a better sense of the pair’s long-term momentum, he could look at a measure that used a period of 100 days or more.

Support and Resistance.

One more benefit of moving averages is that they can be used to determine an asset’s support and resistance. Securities will often find support at important moving averages. For example, if the USD/JPY recently increased over the course of a week and then this upward trend gave way to a sharp drop, the currency pair might find support at its 200-day moving average.

Many forex traders will expect securities to find support once they reach key averages and use other indicators in order to back up their forecast. In addition, these same investors will frequently make use of important averages to predict when currency pairs will run into resistance during their upward climbs.

For example, if a security drops below a key level of support, such as a 200-day moving average, the financial instrument will often have a difficult time rising above this important level. When an investor observes this situation, he can use it to either take profits or alternatively try to generate returns through shorting.

If investors take the time to master the moving average and the many benefits it provides, they will have access to a wide range of tools they would not be able to harness otherwise. With these implements, forex traders can make better-informed decisions and increase their chances of meeting their investment objectives.

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Learn Forex: The 200 Day Moving Average.

Price action and Macro.

One of the most popular indicators in the world is the 200 Day Simple Moving Average .

This indicator can be found on the charts of many investment banks, hedge funds, and market makers as a key point of analysis for a multitude of reasons.

The indicator’s usage has become so widespread that it will often be looked at in Fundamental analysis; for the premise that so many traders may be watching the indicator that corresponding reactions may be seen when price encounters this stalwart of the chart.

For example, during the Financial Crisis the EURUSD currency pair lost over 3500 pips in value (21.58%) in only 3 ½ months. The Troubled Asset Relieve Program (TARP) was announced on October 14, 2008; followed shortly thereafter by the first round of bond purchases by the Treasury department.

This gave the world hope. The market rallied massively.

EURUSD moved up nearly 2400 pips (19.35%) off its lows, rallying all the way until price ran into the 200 Day Simple Moving Average. The chart below will illustrate further:

Created by James Stanley.

This brings us to the first usage of the 200 Day Moving Average; as support and/or resistance.

Support and Resistance.

Few technical attributes can be as important to a trader as support and resistance . And while there are numerous ways of finding potential levels, few are as interesting as the 200 Day Moving Average for the very reason we mentioned at the beginning of this article: The potential for a self-fulfilling prophecy to take place as traders around the world react by selling when price resists at the 200 Day Moving Average, or buying when price is supported by the 200 Day MA.

Created by James Stanley.

Traders can look to place stops below these levels when looking to trade in the direction of the longer-term trend. In the example above, upon noticing that price had reflected off of the 200 Day Moving Average, traders could look to go long with a stop below the 200 Day MA.

So, if price does not move higher, the trader can look to close the trade before the loss grows to an undesirable level. The picture below will illustrate this premise in more detail:

Created by James Stanley.

One of the primary desires of such a strategy is the thought that the trader might be able to get in the trade in the direction of the longer term trend.

After all, if price is moving down to the 200 Day Moving Average, then price is moving lower after having previously traded above that level; indicating that the trend was previously to the upside. This brings us to another popular usage of the 200 Day MA: As a tool to determine trends.

The 200 Day Moving Average as a Trend Filter.

Price has crossed the 200 Day Moving Average only once in 2012 on EURUSD (when looking at a closed bar for confirmation of the crossover).

Price made only six such crosses in 2011, over 3 different instances; many of which were followed by an extended run in the pair in that direction. The picture below will show in more detail:

Created by James Stanley.

Each instance of crossover activity was followed by a corresponding extended movement, with sizes of those moves indicated in the chart below:

Created by James Stanley.

Strategies to Trade with the 200 Day MA.

Traders can build entire strategies around the 200 Day MA. As was seen above, price may run for an extended period of time after crossing the 200 Day MA. So, when price moves above the 200 Day MA, traders can look to go long with a protective stop at the Moving Average. That way, if price does reverse then the trader can contain the loss to a palatable level. Alternatively, when price moves below the 200 Day Moving Average, traders can look to go short with a stop at the Moving Average.

Alternatively, traders can integrate the 200 Day Moving Average into their pre-existing strategies or setups as a trend filter.

Let’s say for instance a trader wanted to trade with RSI. Well, they can do so by filtering trades to only take entries that agree with the 200 Day Moving Average. So, if price is above the 200 Day MA, the trader is only taking entries when RSI crosses up and over 30; or if price is below the 200 Day MA the trader is only taking short entries on RSI crosses down and under 70.

A Note on Risk Management.

While traders may look to employ a multitude of different strategies, the general desire to trade in the direction of the trend brings special relevance to the 200 Day Moving Average.

When price crosses the 200 Day Moving Average, many traders around the world may be taking notice and if price trades below support or above resistance – that can be taken as a sign that the previous trend is over and a new trend may be developing. This is one of the areas that traders can look to avoid The Number One Mistake that FX Traders Make by mitigating the potential loss when the trend reverses.

--- Written by James B. Stanley.

You can follow James on Twitter JStanleyFX.

To join James Stanley’s distribution list, please click here.

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How do I use Moving Average (MA) to create a forex trading strategy?

A forex trader can create a simple trading strategy to take advantage of low-risk, high-reward trading opportunities using just a few moving averages (MAs).

Moving averages are perhaps the most commonly used technical indicators in forex trading. MAs are used primarily as trend indicators and also identify support and resistance levels. In forex trading, the 50-day, 100-day, and 200-day MAs are considered to represent significant support and resistance levels. The two most frequently used MAs are the simple moving average (SMA), which is the average price over a given number of time periods, and the exponential moving average (EMA), which gives more weight to recent prices.

Outlined below is a trading strategy designed for short-term, intraday trading in the forex market. This trading strategy uses EMAs because it is designed to respond quickly to price changes.

• Plot three exponential moving averages – a five-period EMA, a 10-period EMA and 50-period EMA – on a 15-minute chart.

• Buy when price and the five-period EMA both cross from below to above the 50-period EMA, and the five-period EMA is above the 10-period EMA. (For a sell trade, sell when price and the five-period EMA cross from above to below the 50-period EMA.)

• Only take trade signals in the same direction as the trend shown by the 10-period EMA on the hourly chart. As long as the price is above the 10-period EMA on the hourly chart, then only buy trade signals are taken. If the price is below the 10-period EMA, only sell trades are entered.

• Place the initial stop-loss order below the 10-period EMA (for a buy trade), but no more than 10 to 12 pips from the entry price. Move the stop to break even when the trade is 10 pips profitable.

• The initial profit target is 20 pips, or the next identified support/resistance level. Since this is a short-term trading strategy, move the stop-loss aggressively as the profit showing in the trade increases.

Forex traders often use a short-term MA crossover of a long-term MA as the basis for a trading strategy.

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Fundamental traders watch interest rates, employment reports, and other economic indicators trying to forecast market trends.

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