The uses in forex trading of moving
averages and MACD
Moving Averages: If you
consider the "trend-is-your-friend" statement of technical analysis as a
true sentence, the moving averages will be very helpful. Moving averages
tell the average price in a given point of time over a defined period of
time. They are called moving because they reflect the latest average,
while adhering to the same time measure.
A weakness of moving averages is that they lag the market, so they do not
necessarily signal a change in trends. To address this issue, using a
shorter period, such as 5 or 10 day moving average, would be more
reflective of the recent price action than the 40 or 150-day moving
averages.
Alternatively, moving averages may be used by combining two averages of
distinct time- frames. Whether using 5 and 20-day MA, or 40 and 150-day
MA, buy signals are usually detected when the shorter-term average crosses
above the longer-term average, i.e. price will likely go up. Conversely,
sell signals are suggested when the shorter average falls below the longer
one, i.e. price will likely go down.
There are three kind of mathematically distinct moving averages: Simple
MA; Linearly Weighted MA; and Exponentially Smoothed. The latter choice is
the preferred one because it assigns greater weight for the most recent
data, and considers data in the entire life of the instrument making of it
a more accurate indicator.
MACD: Moving Average
Convergence Divergence: MACD is a more detailed method of using moving
averages to find trading signals from price charts. Developed by Gerald
Appel, the MACD plots the difference between a 26-day exponential moving
average and a 12-day exponential moving average. A 9- day moving average
is generally used as a trigger line, meaning when the MACD crosses below
this trigger it is a bearish signal and when it crosses above it, it's a
bullish signal, with the corresponding implications for the currency’s
price in each particular situation.
As with other studies, traders will look to MACD studies to provide early
signals or divergences between market prices and a technical indicator. If
the MACD turns positive and makes higher lows while prices are still
tanking, this could be a strong buy signal. Conversely, if the MACD makes
lower highs while prices are making new highs, this could be a strong
bearish divergence and a sell signal.
.gif)
