Moving Averages

Moving averages often provide objective buy and sell signals, hence they should be watched. They show you if an existing trend is still in motion and help confirm a trend change. Do not rely on moving averages to tell you in advance if there is a trend change imminent; use it as a back-up to your chart analysis for trend identification. A combination chart of two moving averages is the most popular way of finding trading signals. Signals are given when the shorter average line crosses the longer. Price crossings above and below a 40-day and 200-day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.

As can be seen in the EUR/USD 1-hour chart below the 5-period and 25-period moving averages project and confirm the trend in progress. The 5-period moving average crosses over the slower 25-period moving average at 1.2715 confirming the up-trend with an exit point at 1.2770. The same rate 1.2770 is another indication of a resume in the up-trend with an exit at 1.2850.