The most straightforward method is to simply plot a single moving average on the chart.
When price movement tends to stay above the moving average, it indicates that the market is generally in an UPTREND.
Price movement that tends to stay below the moving average implies that the market is in a DOWNTREND.
The difficulty is that it is overly simplistic.
Assume USD/JPY has been in a downward trend, but a news report causes it to spike higher.
The price is currently ABOVE the moving average, as you can see. You consider the following:
“Hmmm… This duo appears to be poised to change directions. It’s time to get this suckerrrrrrrrrrrrrrrrrrr!!!!
So you go ahead and do it. You acquire a billion units because you believe the USD/JPY will rise.
Traders simply reacted to the news, but the pattern continued and the price continued to fall!
Some traders and we recommend that you do the same, plot many moving averages on their charts rather than just one.
Depending on the order of the moving averages, this offers them a clearer indication of whether the pair is heading up or down.
Allow me to explain.
The “faster” moving average should be above the “slower” moving average in an uptrend, and vice versa in a downtrend.
Let’s imagine we have two MAs: a 10-period MA and a 20-period MA, for example. It would appear like this on your graph:
A daily chart of the USD/JPY is shown above.
The 10 SMA has been above the 20 SMA throughout the rise.
As you can see, moving averages can be used to determine if a pair is trending up or down.
When you combine this with your understanding of trend lines, you can determine whether to go long or short on a currency pair.
Adding more than two moving averages to your chart is also an option.
You can identify whether the pair is in an uptrend or a decline by looking at the sequence of the lines (faster MA over slower MA in an uptrend, slower MA over faster MA in a downtrend).
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