Five ways to use Moving Averages

The Moving Average (MA) indicator is the most simple and popular one that is used in currency trading and other markets. You can not go wrong with this indicator if you use it properly. First you need to learn what is the purpose of this indicator and how you can use it in your trading. Choose the one tat seems that seems useful for you and keep using it when you trade currencies in Forex market or anywhere else where you can apply this indicator.

The first way of using moving average is for entry. To be exact its when the market price cross the MA line and close on the other side. This is considered as the price direction change. You may as well wait for the price to come back and touch the MA line which may be even better and more accurate entry. However price not always tend to get back and touch the line. You can add more MA lines on your chart and they can be used to determinate the stop loss or take profit of your trade.

MA line used for trade entry

The second and the most popular use or MA lines is the entry when two MA lines cross each other. Obviously they both need to be set for a different period. This makes first MA to be slow line and the second MA to be the fast line. The entry should be done when the fast MA line cross the slow MA line. Make sure you wait until the price bar/candle is closed before considering if the MA lines are crossing each other completely. Until the price bar is not closed the MA lines may cross each other and get back to their previous state a few times, so in the end the price bar/candle may close even without MA lines crossing each other even if they were for a few moments.

Two MA lines cross used for trade entry

The third way of using MA line is for moving stop loss of your trade. This is called “trailing stop loss using MA line”. In this case you should wait for the new price bar/candle to be opened and simply set the stop loss of your open trade to the same value as the MA line on the previously closed price bar. Make sure the MA line is below the BUY trade entry price or above the SELL trade entry price. This helps to protect your profits when price moves in your favor. Once the price reverses it will hit the MA line and your stop loss as well. Your trade will be closed in profit.

MA used to set stop loss and finally closed when the price touch the MA line

The fourth way to use the MA line is for closing the trade. That is when the price bar close on the other side of the MA line you may consider this to be an “exit signal”. To be exact, when you have the BUY trade you should be looking for the price bar closing below the MA line and for the SELL trade you need to wait until the price bar will close above the MA line. That is a valid “exit signal”.

BUY trade closed when price bar closed below MA

The fifth way to use the MA line is to use it as a filter together with other indicators. If you do not want to rely only on one indicator when entering opening the trade why not use the MA line? This means that you should be looking only for BUY trades when the price is above the MA line and SELL trades when the price is below the MA line. For this you may use the MA line of the higher period like 100 or even 200. For even stronger entry signals you may use multiple MA lines as a filter.

False BUY entries ignored because when price is below MA we take only SELL trades

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