You can use Moving Averages to Determine Trend Direction in Forex by looking at how the Indicator interacts with price.
A moving Average is a price trend following indicator.
It should now make sense for you to use a moving average to determine the direction of a trend.
Just follow the direction to which the moving average is pointing.
If you think ADX is a bit complicated, moving average is the best option for you.
No hustle you just look at the way it moves.
More to that it moves along with price. Unlike the ADX indicator which is separate from the price chart
Moving averages are in fact the most popular trading tools most traders use because of their simplicity.
We shall now show you how to use them on a chart.
How to use moving averages to determine trend direction
Points to note
When price is in an uptrend, the moving average moves below the price action. As the moving averages expand further from price, it indicates a strong uptrend a head.
However, if the moving averages moves in between price, the trend is becoming weak. Across over of moving average and price may signal a possible change in trend direction.
Take a look at a market chart below with simple moving average(SMA).
On the other hand, when price is in a downtrend, the moving average moves above the price action.
Similarly, if the moving average moves away from price, expect a strong fall of price(downtrend).
If the moving Average moves between price action, the trend is getting weak and on a crossover,price is likely to change course.
Let see an example on the chart below.
You can also use more than one moving averages all combined together. But choose the slow(more periods) and the faster moving averages(less periods) combination.
We will use a slow(21) and a fast(14) Simple moving averages.
Below is a USDJPY, Hourly market chart with Moving Averages (21 SMA &14 SMA)
From our chart above, when price is moving above the moving averages, it indicates an uptrend.
As the 21 SMA separates from the 14 SMA below the price action it indicates a strong uptrend.
When the two moving averages contract, its an indication for price consolidation.
On the other hand when price is moving below the moving averages it’s an indication for a downtrend.
Also, as the 21SMA or the slow moving average moves away from the fast moving average 14 SMA above the price action, it indicates a strong downtrend.
More so, as the moving averages cross over each other, it indicates a probable change in the market trend direction.
In our previous lessons,
We learnt how to enter trades using moving average crossover and how to combine the indicator with other indicators for stronger signals.
You may take a look back at the previous topics on indicators and learn more on how to use them to your advantage.
In our next lesson, we shall look at how to use these indicators in ranging markets. Just click next and join us
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