It has been said many times: “The trend is your friend.”

The question is, how does one find the trend? It often comes down to using various indicators to help determine which way a currency pair has been moving, and thus where it might go next. One of the most popular to use to help determine this information is the moving average.

When the price of the currency pair stays below the moving average, then the pair is said to be in a downtrend. When it is above the moving average, it is said to be in an uptrend. Both are movements that can potentially be capitalized on, but the trader needs to be aware of how the different trends should impact their trades.

The best recommendation from most experienced traders is that a trade should be placed in line with the prevailing trend. There is no heroism in placing a trade that goes hard against the trend. This is actually a recipe for disaster in most scenarios, and it is a good way to lose money.

Don’t Get Faked Out

Try not to get too caught up in whether the price is just above or just below the moving average. Sometimes, using the moving averages alone is too simplistic.

Check out this example:

 

Try to use other indicators to help determine if the trend you are seeing is indeed the trend that is there. Sometimes, it appears as though a trend has been broken (see images above), when in reality it is nothing more than a movement based on some piece of news that has come out. There is always the chance that the pair will move back into the trend that it was working on before the news came out. This is why experienced traders always know to wait until there is confirmation of the trend that they believe exists before pouncing on every movement that occurs.

Moving averages are a great way to get an idea of how the market is behaving, but only treat them the same as you would any other indicator. They are just a piece of the puzzle, and you need to see the whole picture to make sense of what you are looking at.