Moving Averages in the Forex Market

A moving average (MA) is an old and reliable tool used by traders to smooth price data. For example, a 20-day simple MA is the sum of prices for 20 days divided by 20. The smoothing makes it easier to see the underlying trend. Many traders use the MA for just this purpose alone.



In the chart below, you see that a 55 day exponential MA (in red) tends to follow the trend line fairly well on the EURUSD daily chart. As prices moved up from the bottom on the left side of the chart, the MA soon turned up as well.

In addition to displaying the underlying trend, there are three other ways you can successfully use a moving average (MA) in your trading.

The first is for determining support and resistance. In the Euro daily chart, you can see that the last three times price has approached the MA, it has served as support. The pair touched the line again on December 4, 2009 and it remains to be seen whether the EMA will again serve as support. You can experiment with different moving average lengths to see which ones are most effective, depending on the pair you trade and the period you use for trading.