What is the Four Average Indicator?
The four most commonly used indicators in forex trading are the moving average, relative strength index (RSI), Bollinger Bands, and Fibonacci retracement.
The moving average indicator is used to smooth out fluctuations in price action and identify trends by averaging out past prices.
The RSI indicator compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset.
Bollinger Bands are a volatility indicator that consists of a moving average and two standard deviations plotted above and below the moving average.
Fibonacci retracement is a technical analysis tool that uses horizontal lines to indicate areas where the price may experience support or resistance. These levels are determined by the Fibonacci ratio of 23.6%, 38.2%, 50%, 61.8% and 100%.
Four Average Indicator Strategy
Another popular forex trading strategy is the “four average” strategy, which involves the use of four different moving averages. The strategy combines four different moving averages with different time frames to create a comprehensive picture of the market trend.
To implement the strategy, the trader will first set four moving averages on their chart, one with a short-term period, one with a medium-term period, one with a long-term period, and one with a very long-term period. The trader will then watch for the short-term moving average to cross above the medium-term moving average, which is a bullish signal, and indicating to buy. Conversely, if the short-term moving average crosses below the medium-term moving average, this is a bearish signal, and indicating to sell.
The trader can also use the cross of medium-term moving average with long-term moving average and long-term moving average with very long-term moving average as confirmation of the trend.
Buy Signal
- The trader sets four moving averages on their chart, one with a short-term period (e.g. 10 periods), one with a medium-term period (e.g. 30 periods), one with a long-term period (e.g. 50 periods), and one with a very long-term period (e.g. 100 periods).
- The trader watches for the short-term moving average to cross above the medium-term moving average, which is a bullish signal.
- In addition, the trader can also watch for the medium-term moving average to cross above the long-term moving average, which is also a bullish signal.
Sell Signal
- The trader sets four moving averages on their chart, one with a short-term period (e.g. 10 periods), one with a medium-term period (e.g. 30 periods), one with a long-term period (e.g. 50 periods), and one with a very long-term period (e.g. 100 periods).
- The trader watches for the short-term moving average to cross below the medium-term moving average, which is a bearish signal.
- In addition, the trader can also watch for the medium-term moving average to cross below the long-term moving average, which is also a bearish signal.
Four Average Indicator Pros & Cons
Pros
- It helps to identify trends by combining multiple moving averages with different time frames.
- The use of multiple moving averages can provide a more comprehensive view of the market compared to using a single moving average.
- It can be used to confirm the trend with multiple levels of support and resistance.
Cons
- It can produce false signals if used alone, especially in a ranging market.
- It may generate a large number of signals, which can lead to over-trading and increase the risk of losing money.
- It may produce conflicting signals if different moving averages are pointing in different directions.
- It may not be suitable for short-term traders who are looking for quick trades.
Conclusion
In conclusion, the four average indicator is a popular tool used by forex traders to identify trends by combining multiple moving averages with different time frames. This strategy can be used to confirm the trend with multiple levels of support and resistance, and can be used in combination with other indicators to set stop loss and take profit levels.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
