What Kind of Trader Are You? Moving averages are one of short term moving average strategy forex most commonly used technical indicators across a wide range of markets. They have become a staple part of many trading strategies because they’re simple to use and apply. Although moving averages have been around for a long time, their capability to be easily measured, tested, and applied makes them an ideal foundation for modern trading strategies, which can incorporate both technical and fundamental analyses.
While simple moving averages aren’t weighted toward any particular point in time, exponential moving averages put greater emphasis on more recent data. How it works Most trading platforms plot simple moving averages for you, but it’s important to understand how they’re calculated so you can better comprehend what’s happening with price action. For example, a ten-day SMA is calculated by getting the closing price over the last ten days and dividing it by ten. When plotted on a chart, the SMA appears as a line that approximately follows price action — the shorter the time period of the SMA, the closer it will follow price action. A favorite trading strategy of ours involves 4-period, 9-period, and 18-period moving averages, helping to ascertain which direction the market is trending. The use of these three moving averages has been a favorite of many investors and gained notoriety in the futures market for stocks. First, it’s important to remember that shorter moving averages will hug price action more closely than longer ones because they’re focused more on recent prices.
From this, you can deduce that shorter moving averages will be the first to react to a movement in price action. It’s important to note that this strategy should be used in conjunction with the overall trend of the market. 4-period SMA crosses over the 9-period SMA and they both then cross over the 18-period SMA. Aggressive traders can enter the position if they see a strong crossover of the 4-period and the 9-period SMAs in anticipation of both crossing the 18-period SMA. In this case, we recommend ensuring that all moving averages are running in the direction of the break and that you keep a close eye on momentum. If momentum starts to dwindle early, it can be an indication of a weak trend.
Keep an eye on the overall trend by using medium-term and long-term time frames. If the market is trending in either direction, then investors have to be watchful of retracements in the opposite direction. Sometimes price action can retrace sharply, which causes the 4-period and 9-period SMAs to cross over the 18-period quickly, but because it’s a retracement and not part of the overall trend, price action can run out of steam fairly quickly. A trend that’s losing momentum will become evident sooner in the short-term SMAs. Exit This is where the strategy becomes more subjective.