The Moving Averages are some of the most popular technical indicators in trading, one of the reasons being that they are straightforward to understand. Even for beginners who don’t know anything about markets or technical analysis, the concept of MA is simple enough.
These lines are called moving averages because their value moves along with time, i.e. every new data changes the indicator’s value. The two most common types of MAs are Simple Moving Average (SMA) and Exponential Moving Average (EMA).
For traders using the Singdollar, SMA is used more commonly than EMA since this line gives a better idea of short-term price movements than EMA, which shows long-term trends more clearly; explore this here. Conversely, EMA is more prevalent among traders using the US dollar.
So what does this mean?
It means that when you decide to trade Singdollar pairs with MA lines, you need to use SMA, and for trading USD pairs, you should use EMA.
As important as it is for a trader to know the average that will be used by themself, it’s not comparable in terms of importance with how they use these lines. To get the best out of MAs, traders must understand their capabilities and limitations.
One can easily see from a chart that averages are used by comparing the candlesticks around them. For example, once an indicator has been plotted on a chart, a long-shadowed candlestick appears, indicating that a short-term average is being used.
Another thing worth noticing is the length of the moving average; its value should be chosen according to the time frame you are trading in.
Once these things have been set up correctly, traders use MAs in two primary ways: entering trades when prices start crossing them and using them as support and resistance levels. For example, take an SMA with a value of 20 and an EMA of 50 on a daily time frame for the USD/SGD pair. When the price is below both lines, it indicates enough supply in the market; hence one can expect a downtrend.
Demand exceeding supply
However, once the price moves above EMA, it signals that demand has exceeded supply, and prices are likely to increase. If you watch closely, you will notice candles forming around these lines indicating fluctuations between trend forces. All you have to do is wait for a candle to close where SMA is more significant than EMA. E.g. If the closing price crosses over line A but not underlined B, it’s advisable to enter into a long position as there are higher chances of continuing an uptrend after this point.
Identify resistance and support.
Another way to use MAs is to identify resistance and support, which happens when the price reaches these levels after crossing MA. For example, you can set up your chart with 20, 50 and 200 SMA on daily charts for the USD/SGD pair.
Now, if the price trends downward, it first touches line B (50) but doesn’t break through it, i.e. it remains above this line; hence this becomes a level of support against downward movements.
Whenever prices reach the point where they touch or cross over 50 (in this case, it crosses under), they automatically become resistant to upward movements since long traders would exit their positions, entering into selling pressure. On the other hand, whenever prices reach A (20), they resist movements downwards because buyers would enter the market entering into buying pressure as they would be willing to pay a higher price for this pair.
Now you can see how MAs are handy tools in your trading arsenal, and those who know how to use them correctly have an advantage over others. But remember, not all traders have access to great mentors, so it’s essential that you learn these basic things yourself, take help from books or find a mentor if possible since it’s not easy to trade by trial and error method unless you are fortunate.
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