Forex is one interesting assets to trade. It usually involves high risk. But if managed properly, it can be the star performer of your portfolio. Technical analysis helps you to trade better. There are some tools like indicators to help you make better decision. As a technical trader you should know technical indicators. These indicators tell you the stories of what is happening to the currencies on the chart. One class of technical indicators is called moving average indicator. These indicators are useful in identifying the beginning or the reversal of the trend.
Elementary Form of Indicator
It is the basic moving average indicator which is simply an average of currency of specified period. You give the periods as the input. 21 days moving average is most common. It is an average of the price of a currency of last 21 days. For next day, yesterday’s price replaces the price of first day. With some mathematical twists, other forms of indicators like exponential are constructed. You can identify the trend in two ways. A simple look at the graph will tell you the trend. The second method is to look the location of the indicator. If currency is above the indicator then trend is up and if it is located below the indicator, trend is considered to be down.
Add Envelop to Indicator for More Data
Next type of moving average indicator is called moving average envelop. It presents you more information than simple indicator. It has a band around the price which tells you if the currency is overbought or oversold. At certain percentage on either sides of the average, envelop is formed. The percentage is determined by the currency pair and the timeframe you are looking at. If the currency is above the indicator and touching the upper band, the trend is up. The price below moving average and closer to lower band will tell you the down trend. If the price is flip flopping above and below the indicator without getting close to either of the bands, then you can safely interpret that the currency is consolidating. The trend can be effectively determined with this indicator.
MACD
This moving average indicator popularly known as MACD is an advanced version of moving average. You are required to give inputs of exponential averages of three periods. The indicator consists of two line. The default value of the inputs are 12, 26 and 9. The difference between the fastest and slowest average forms the first line. By default it will be the difference of 12 and 26. This line is known as the fast line. The exponential average of third input is called signal line. By default it is 9. When these two lines cut each other, it is considered to be a buy or sell signal. Other variation is called line MACD indicator.
Moving average indicator is used in conjunction with the price action to confirm the trend. It can not be used when the currency is not trending. Identify the trend and use this indicator for buying and selling the currencies.
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