Moving averages can also be used to determine the direction of a market trend by just looking at the way they move on the chart.
Moving averages are one of the most used indicators by traders. Let’s take a look at a market chart with simple moving averages(SMA). We will use a slow(21) and a fast(14) moving average.
Below is a USDJPY, Hourly market chart with Moving Averages (21 SMA &14 SMA)
From our chart above, when price is moving above the moving averages, it indicates an uptrend. As the 21 SMA separates from the 14 SMA below the price action it indicates a strong uptrend. When the two moving averages contract, its an indication for price consolidation.
On the other hand when price is moving below the moving averages it’s an indication for a downtrend and as the 21SMA or the slow moving average moves away from the fast moving average 14 SMA above the price action, it indicates a strong downtrend.
As the moving averages cross over each other, it indicates a probable change in the market trend direction.
In our previous lessons, we learnt how to enter trades using moving average crossover and how to combine the indicator with other indicators for stronger signals. You may take a look back at the previous topics on indicators and learn more on how to use them to your advantage.
For now let’s see how to use these indicators in ranging markets as our next topic.
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