The Best Forex Trading Indicator for Defining Forex Price Trends
By Kelly Price
If you want to make money trading forex then you need to follow forex trends and here we will look at the best forex trading indicator for defining them and entering trends with optimum risk reward once the trend is in motion.
A Simple moving average is the best indicator and used with trend lines will help you spot and stay with the trends and pick areas of value to buy into.
Here we will look at there advantages and also the best time periods to use
Moving averages have one single aim:
They identify price trends over specific periods smoothing out the day-to-day price fluctuations that are caused by short term volatility.
The equation for a moving is simple:
The closing price is added up and divided by the period of the moving average.
This means that the moving average will lag the actual market price.
The reason it works is that humans push prices to far up or down and away from the moving average but prices will tend to come back to the average after the emotional spike has occurred.
You should use moving averages for long term trends only - they are of no use whatsoever in day trading, forex scalping or swing trading.
The best time periods are of course all a matter of subjective judgment - but we love the 40 day and 20 day periods.
We use a stop behind the 40 day moving average to protect us when long term trend following and buy dips back to the 20 day moving average, to enter an existing trend with the best risk to reward...
IMPORTANT POINT!
Moving averages are a lagging indicator and cannot be used to enter positions they are simply there to define the trend and give value areas and there very good for this - NOT for entering trading positions. Many traders simply see a dip to a moving average and buy - but this is predicting and guessing and you won\'t get rewarded for that.
You must use some leading indicators in terms of price momentum to time your trading signal and make sure the odds are prices will rise away from the average.
Good momentum indicators are, the Relative Strength Index (RSI) and the stochastic - they are discussed in our other articles so look them up.
Many traders ignore simple moving averages and their making a mistake, because moving averages work and will always work, as all temporary price spikes are short lived and subside.
Moving averages can help you catch these dips and isolate areas of value, combine them with some momentum indicators and you have a powerful combination to seek forex trading profits.
Try moving averages and you will see they are the best forex trading indicator for defining a trend - simple? Yes, but very effective and profitable.
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