As traders we are bombarded with a range of methods to select and manage trades in order to be profitable
These range from selecting potential trades based on:
- the fundamentals of the various domestic economies of the currency pairs you are interested in trading; or
- using primarily price movements in the form of support and resistance areas, candlestick patterns, Elliott wave patterns, Fibonacci retracements etc; or
- using technical indicators such as moving averages, MACD (Moving Average Convergence Divergence) momentum and volatility indicators : and of course
- some combination of one or more of the above
After years of investigating, researching and testing a myriad of different systems I found that the most effective method remained the stalwart of them all…technical indicators. By comparing the trade entries and exits being signalled by other methods with those of the main technical indicators, overall I found very little difference in results.
So, I decided to focus my trading on strategies using technical indicators. Because they are both simple and effective to use. And they can be easily automated.
So which technical indicators should you use when trading forex?
From my perspective the main trading indicators are Moving Averages, RSI, MA of RSI, double MA crossover of RSI, and (zerolag)MACD. They can be used either separately or in combination with each other.
So let’s explore each of them in turn.
What they are?
Moving averages are just a way of smoothing out the price over a given time period. They are hence referred to as trend indicators.
There are different ways of smoothing the price and this is explained well at
I use the following types of MAs in my trading:
- Simple Moving Average (SMA)
- Exponential Moving Average (EMA)
- Smoothed Moving Average (SMMA)
- Linear Weighted Moving Average (LWMA)
How to use Moving Averages in forex trading:
There are essentially two ways of using MAs:
- as support/resistance lines – eg if we use a 200 period SMA then when price stays above the 200 SMA we say that the 200 SMA is acting as Support; when price stays below the 200 SMA then the SMA is acting as Resistance. And the trend is regarded as being Long when price is above and Short when price is below the 200 SMA.
- as crossovers for entering and/or exiting trades – for example, we enter a Buy trade when the 10 SMA moves above the 20 SMA; and a Sell trade on reverse.
Combining Moving Averages to develop a trading strategy is just a matter of researching and testing. The simplest form is to use the cross of a fast MA over a slower MA. This can provide good entry points but due to the lag inherent in MAs it is usually necessary to exit the trade before the reverse cross occurs.
For this reason I prefer to use a triple MA crossover strategy in which the medium MA acts like a trailing stop or early exit and the slow MA as the Support/Resistance line..
By way of example I have used a triple Moving Average Crossover Strategy on the daily chart of the NZD/JPY as shown. This uses a fast EMA of 10, a medium MA of 30, and a slow 60 SMMA (smoothed MA) as detailed below.
As shown, we would have been in the Buy trade from August 2013 (refer label “Enter a Buy when 10 EMA crosses 30 EMA”) to January 2014 (refer label “Exit Buy trade when 10 EMA crosses 30 EMA trailing stop”) and re-entered in February 2014 (Re-enter Buy trade when 10 EMA ….), exiting early in May 2014 on the basis of the crosses of the two faster, 10 and 30, EMAs, all the while being above the 60 period smoothed MA acting as support.
Strategies like this can be done on any timeframe but you have to experiment with different settings for the MAs. And though it would be ideal, these nice long term trends as in the example shown above don’t happen often! Just look at the whipsaw period in the months preceding the Buy trade in the example above.
There are two further options with MA settings on our MT4 platforms that we can explore.
We can shift the MA forward or backwards by entering a value in the Shift field of the MA menu box. And we can change the price point on which the MA is calculated by varying the “Apply to” field of the MA.Personally I have found the default setting of 0 for Shift to be the only one worth using, but sometimes it does pay to experiment with the “Apply to” settings – for instance using different values (open, close, high, low etc) for the fast and medium MAs.
(Use the option of “Apply to First Indicator” when you want to have a MA of say RSI if that is the other indicator that you have placed on your chart.)
In order to test the effectiveness of the various moving average combinations and crossovers over a range of currencies and trading periods it is so much simpler to have these automated …hence my FX Autotrader Elite was conceived.
It allows me to test the range of technical indicators I now use in my trading strategy, run parallel strategies as part of my ongoing strategy finetuning, and as an expert advisor it takes the trades based on the parameters I set.
By using Moving Averages in combination with added confirmation by other indicators, you can provide even greater certainty for your entry and exit points.
Further information on MACD, zerolag MACD, RSI and their combinations with each other and Moving Average indicators will be covered in future articles.