Moving averages are the most popular indicator used in technical analysis. Moving averages give the trader instant information on trends, whether they be long-term or short-term.
There are many different ways to use moving averages. The most popular is to apply two moving averages to a currency chart, one high and one low, and trade when the two intersect and cross each other in opposite directions.
When two moving averages cross, it indicates that price has been moving and is forming a new trend. Jumping on the trend bandwagon early and riding out max profits is the goal.
Generally, the difference between the two moving averages signifies how drastic the price movement is. If you have a Simple Moving Average (SMA) of 5 and 100, then any cross between those two will be one heck of a price movement compared to SMA's of 5 and 20.
There is a double-edged sword involved with moving averages which requires great precision to avoid.
On the one hand, if you pick really high moving averages, then it will indicate bigger price movement, but at the expense of very late detection. By the time you enter the trade, you will have missed most of the movement. You'll be catching the tail end, which will lead to little or no profit.
On the other hand, if you pick really small moving averages, then any cross between them is prone to lots of "fake-outs". The cross simply is not very significant. No trend could even be forming. They will cross often without signifying a good trade to enter.
So what type of moving averages should you use?
Start in the middle and experiment. The time frame definitely makes a difference here. Daily charts can benefit from smaller moving averages and still pick up lots of pips, while the 5 minute chart can get away with larger moving averages.
This is counter-intuitive, but if you think about it you'll understand why it is true.
The Daily Chart all ready shows big movement because each individual candle represents a day. Opposite with the smaller time frames, where each candle represents 5 minutes.
Thus, just catching a tiny trend on the daily chart can lead to big pips and vice versa for the smaller time frames.
So how do we put this to work and start to profit from it immediately?
There are an infinite number of moving average systems out there. There are no magical numbers, but experimentation can grant you some pretty darn dependable ones.
Here is one of my favorites:
EMA (Exponential Moving Averages)
5 EMA - apply to CLOSE --> Shift -1
8 EMA - apply to OPEN --> Shift 0
*TIP* This works on a lot of different time frames, but it works best on larger time frames. I prefer the DAILY CHART. One trade taken with this baby on the DAILY CHART can give you 1400 pips in one month. Master the trailing stop and you can set it and forget it! How would you like to spend 10 minutes placing the trade, come back a month later, and find you made anywhere from $140 - $14,000 (depending on lot size -- .01 - 1)?!
That's all for now!
To your success!
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