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.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.