The moving average indicator can be an excellent trading tool for identifying and entering trends on currency pairs. However, it is important to be able to time your entry and exit so that you can catch the most significant market moves and try to avoid false signals. For that reason, I would not use the moving average on its own, but instead combine it with other technical indicators and price action analysis. This can help to filter some of the bad trades to create a more complete moving average trend strategy.
What is the moving average in forex?
The moving average is a technical indicator that you place on your currency pair charts. It will show you if the market is trending upwards, downwards or if we are in a range bound market. The default period for the moving average is usually 14, although you are free to amend the MA period according to your preferred trading style.
If you were to decrease the MA to a period of say 7, then it would be more susceptible to price fluctuations which could mean more false signals. However, it will also mean the moving average might be lagging less. On the other hand, if you used a 50-period moving average, it would probably do a better job of spotting long term trends. The downside being that it may be late to point out the short-term trends.
How to trend trade with the moving average?
The main purpose of trading with a moving average is to trade with the trend. You could use it to enter the trend on a moving average breakout or moving average crossover. 2 of the most important moving averages are the 50 and 200 period MA’s. When they cross to the upside this is known as the golden crossover. When they cross to the downside, this is known as the death crossover.
In theory, you could trade using one, two or even 3 moving averages. If you use too many, this may cause confusion and give contradicting trading signals. Instead, I like to use a couple at most and time my entry and exit with other technical indicators such as the stochastic, ADX and RSI. These can help us to enter the trend on a pullback so we don’t end up buying at the peak and selling at the bottom.
I also keep an eye on support and resistance levels along with any candlestick patterns. If price is above the moving averages and breaks out above resistance with a bullish candlestick pattern, this could be a strong signal to take a buy position. This would probably give a moving average trend strategy an edge compared to trading with the MA’s on their own.
Buy signal
- Price is above 14-period moving average
- Price is above 50-period moving average
- 14-period MA is above 50-period MA
- Price is rejecting support or breaching resistance
- Stochastic main line is crossing signal line upwards
- Stochastic is near extreme oversold area
- Bullish price action formations
You can see from the USD/JPY 1-hour chart below that the moving average trend strategy was able to catch a huge upwards move. All of the conditions have been met with the 14 MA above the 50 MA. The price is above the moving averages and the stochastic crossover has happened in an upwards direction below the 50 level. This suggests plenty of momentum left to the upside. We can see that price has breached a recent resistance level which is now holding up as support. There are bullish candlestick formations including the hanging man pattern. If we placed the stop loss just below the 50 MA, it would have only been around 15 pips. This is very tight when you consider it is a 1-hour chart and the price went upwards over 700 pips. You can see that the stochastic crossover would have given ample opportunities to enter this trend on the way up. A trailing stop moving with price just on the other side of the 50 MA could have also been a good way to maximise the potential of this particular trade.
Sell signal
- Price is below 14-period moving average
- Price is below 50-period moving average
- 14-period MA is below 50-period MA
- Price is rejecting resistance or breaching support
- Stochastic main line is crossing signal line downwards
- Stochastic is near extreme overbought area
- Bearish price action formations
In the USD/JPY 1-hour chart below, you can see that all of the sell trade conditions have been met. The moving averages are suggesting a downtrend and price has crossed them both. The short-term moving average is below the long-term moving average. Price has breached a recent support level which has now became a resistance level. The stochastic crossover has happened in a downwards direction near the extreme 80 level to confirm the downwards momentum. We also have lots of bearish price action patterns including the hanging man formation. If we placed the stop loss just above the recent resistance level, it would have been around 25 pips. This is very good when you consider this downwards trend carried on for around 900 pips. There was ample opportunity to bag some pips and trade with a favourable risk to reward ratio.
Moving average trend strategy Pros & Cons
Pros
- Can catch some big currency pair trends
- Can trade on any currency pair and timeframe
- Can be combined with other market analysis
- Lots of traders watch the moving averages
- Moving average indicator is popular and free to use
Cons
- Need to time entry and exit
- Requires good money management
- Lots of false signals in choppy markets
Conclusion: is it worth trading forex with the moving average trend strategy?
Yes, I think this can be a very solid strategy when combine with other forms of market analysis. It can enable us to catch some big market moves which means less time chart watching, less broker fees and possibly more pips.
However, it does require the user to take some initiative in terms of confirming the buy/sell signals in the direction of the trend. There will be false signals so good forex money management is important.
I would want to cut losing trades short and allow winning trades to run. This could help to prevent one bad trade wiping out a consecutive run of winners. I might even use a trailing stop to maximise each market trend.
If you are looking for a forex trend trading strategy, then you could always try this on a demo account to begin with and see how things go. You can get a free forex demo account from most brokers including IC Markets. They have very tight spreads and low costs for trading forex, along with multiple funding options and excellent customer support.
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.
