Term Trends - Simple Moving Averages

March 18th, 2009 by admin

Term Trends - Simple Moving Averages: Let the Short & Long-Term Moving Averages Point the Way! Also, here’s another way to define trends on any timeframe of chart. If you plot a 200 simple moving average on your chart, that will track the long-term direction for the time frame that you are presently on at the time.

A 20 simple moving average tracks the shorter-term direction of the pair at the time.

See the daily, 1-year chart of USD/JPY (below) for instance. Some people will look at that pair and say, “It’s in a downtrend.” Others will say, “No, it’s in an uptrend.”

Well both could be right DEPENDING upon what timeframes they are discussing. For instance, in the above chart, the longer-term trend over the course of the past year has been downward overall. So if the long-term is your focus, then the correct answer is “down.”

However, if you are looking at the recent activity over the past couple of months, then that latest activity is in a definite uptrend. However, that’s in the shorter (near) term. So the short-term trend is “up” and the long-term trend is still “down.”

Once the pair breaks and holds back above its 200 simple moving average (SMA) and the SMA starts to turn upward, then you can say we are in a long-term uptrend at that point typically.

So just to recap: 1. Look at the far left and right of the chart. Is it going up overall, down overall or just sideways? This is one way to tell the trend.

2. The other easy way to tell the trend is to use a 20 and 200 simple moving averages (SMA) on your chart. Look to see the slope of the line and which direction it’s headed in and you have your trend direction.

Trading note: Your highest probability trades are when the short and long-term trends are running in the same direction. So if your 200 SMA is pointing upward, it’s perhaps better to wait for the 20 SMA to climb above the 200 SMA and heads higher before placing your buy order.

Remember, that you can use these averages on any timeframe: 15 minute, one hour, four hour, daily charts, etc. The moving average will tell you what direction the pair is heading in for the timeframe you prefer to trade.

Source: FX University Daily

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Posted in Forex, Forex Signals
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