Moving averages are one of the simplest forex indicators available, and they are also one of the most profitable. Moving averages can be used to differentiate between trending and ranging markets, identify entry and exit points, and even serve as support and resistance. Today I want to look at the most popular moving averages and how you can make money from them.
The 200-day simple moving average (SMA) is the most popular average used in forex trading. Simply place the 200-SMA on your daily chart and you will be using perhaps the most popular trading indicator in the world.
Many traders use the 200-day SMA as a directional bias. This simply means that it tells you which way you should be trading.
For example, if the price is above the 200-SMA, you should be looking for long trades. If the price is below the 200-SMA, you should be looking for short trades.
Notice I said you should be looking for a trade, not necessarily taking a trade. There are other aspects of a good trade that you need to see before entering the market.
One great indication is that the market is making lower highs and lower lows while the price is below the 200-SMA. This indicates that not only is the current price lower than average, but the market has not run out of momentum and is still falling lower.
A perfect scenario would look something like this:
The price starts high at point A, falls to point B, rises to point C, and then falls to point D.
There is something really important to notice in this setup though.
Point C should not go higher than point A? That is what I mean by lower highs.
If you see this setup on a chart while price is below the 200-SMA, you want to go short when price drops lower than B and place your stop loss slightly above point C.
And that is how you make money in the forex using moving averages.