Traders often use a simple moving average created with a larger number of periods (such that it is reflective of long term trends) as an average price line – a line that serves as a base point for the market to move with, above or below.
This long-term average price line should serve as a support line in an uptrend and a resistance line in a downtrend.
If prices penetrate that long-term average price line, the trend could be slowing, the market heading toward a reversal. Certainly don’t trade on that first average price line penetration alone – wait for confirmation signals that the market is indeed heading to a reversal.
Moving Average Crossover Indicator in the Forex Market
In addition to using a simple moving average as a long-term average price line against which you can measure current price movement, two moving averages (one fast, one slow) can also be used together to generate buy and sell signals.
This type of indicator is called the moving average crossover, and can be a very nice compliment to the average price line.
The moving average crossover indicator is formed of two exponential moving average lines.
One is considered fast; that is, it incorporates a smaller number of periods and therefore reflects more of the current market volatility. The other exponential moving average line (EMA) is considered slow; that is, it incorporates a larger number of periods and therefore reflects more long term movement and less of the current market movement.
Different traders create the exponential moving averages with different number of periods. However, a safe default is to set the fast indicator at 10 periods and the slow indicator at 25 periods.
Again, the numbers 10 and 25 refer to the number of previous periods encompassed in the moving average. The moving average set 10 periods back is referred to as the fast moving average because it is more volatile (swings more) because it only encompasses 10 periods.
The moving average set 25 periods back is referred to as the slow moving average because it is less volatile (it swings less, or more slowly) because it encompasses 25 periods.
As the indicator’s name suggests, you will be looking for Forex trading signals when one of the exponential moving averages crosses over the other. If the slow EMA (the one set at 25 periods) crosses over the fast EMA (the one set at 10 periods) the market is likely slowing down, possibly heading into a new downtrend. Therefore, when the slow EMA crosses over the fast EMA, the market is offering you a sell signal.
Wait until you have confirmation of the reversal from other indicators (such as a downtrend trendline break, a King’s crown, etc.) before trading on the moving average crossover.
Conversely, if the fast EMA crosses over the slow EMA, the market is likely speeding up, possibly heading into a new uptrend. Therefore, when the fast EMA crosses over the slow EMA, the market is offering you a buy signal. Wait until you have confirmation of the reversal from other indicators (such as a uptrend trendline break, a King’s crown, etc.) before trading on the moving average crossover.
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