The Uses In Forex Trading Of Moving Averages And Macd
By Adrian Pablo, Thu Dec 8th
Moving Averages: If you consider the "trend-is-your-friend"statement of technical analysis as a true sentence, the movingaverages will be very helpful. Moving averages tell the averageprice 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, sothey do not necessarily signal a change in trends. To addressthis issue, using a shorter period, such as 5 or 10 day movingaverage, would be more reflective of the recent price actionthan the 40 or 150-day moving averages.
Alternatively, moving averages may be used by combining twoaverages of distinct time- frames. Whether using 5 and 20-dayMA, or 40 and 150-day MA, buy signals are usually detected whenthe shorter-term average crosses above the longer-term average,i.e. price will likely go up. Conversely, sell signals aresuggested when the shorter average falls below the longer one,i.e. price will likely go down.
There are three kind of mathematically distinct movingaverages: Simple MA; Linearly Weighted MA; and ExponentiallySmoothed. The latter choice
is the preferred one because itassigns greater weight for the most recent data, and considersdata in the entire life of the instrument making of it a moreaccurate indicator.
MACD: Moving Average Convergence Divergence: MACD is a moredetailed method of using moving averages to find trading signalsfrom price charts. Developed by Gerald Appel, the MACD plots thedifference between a 26-day exponential moving average and a12-day exponential moving average. A 9- day moving average isgenerally used as a trigger line, meaning when the MACD crossesbelow this trigger it is a bearish signal and when it crossesabove it, it's a bullish signal, with the correspondingimplications for the currency's price in each particularsituation.
As with other studies, traders will look to MACD studies toprovide early signals or divergences between market prices and atechnical indicator. If the MACD turns positive and makes higherlows while prices are still tanking, this could be a strong buysignal. Conversely, if the MACD makes lower highs while pricesare making new highs, this could be a strong bearish divergenceand a sell signal.
About the author:Adrian Pablo; Forextraderand freelance writer.
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