One indicator that is often used by traders to get a profitable consistent forex trading technique is the Moving Average (MA). MA is classified as the simplest indicator of all indicators in the world of forex trading, because it is only simple statistics are applied in the form of 2-dimensional lines. This MA itself has many variants depending on the period of data to be retrieved. Also from this MA, other indicators emerge which are developments from the MA, for example Bollinger Bands.
As the name implies, MA is the average of movements divided by time period. So if we make an average of 20 candlesticks to be used as a calculation, it is called MA 20. Then, if we use 50 candlesticks data as calculation material, then it is called MA 50. Typically, the MA that traders often use is MA 20, MA 50, MA 100 and MA 200. However, this does not mean that there are no other MAs, only the four MAs are automatically in the MT4 display. If you want to make an MA with another value, enter the number you want in the settings section of this indicator.
The Appearance of MA 20
MA is often used by traders, both small scale traders and large analysts. This indicator is usually used not just one, but two or more at a time. This is because if you use one indicator, the information obtained is only in the form of a line that shows the average of a currency’s movements. Meanwhile, to see a change in trend or when going to enter an order, it needs at least 2 MAs that are used simultaneously.
The term that often appears when using two or more MAs is MA crossing or MA intersection. This intersection is used by forex traders to analyze trends, whether it is sideways, up or down. This analysis will then be the basis for traders to order a position on a currency pair. Simple trading technique but profitable and widely used by traders all over the world.
MA 20 (Yellow Line) and MA 50 (Red Line)
Simple trading techniques but profitable from the use of MA come in many types, in addition to using intersection. There are also those who use MA to see the strength of buyers and sellers, that is, if the candlesticks are below the MA that mean the sellers are dominant. Conversely, if the candlesticks are above the MA that mean the buyers are currently dominant. For traders who follow the trend, they will prefer to buy when the candlesticks are above the MA and sell when the candlesticks are below the MA.
While for those who choose against the trend, they will choose to sell when the candlesticks are above the MA and hope it will return back below the MA. Conversely, for those who buy they will wait for the candlesticks are below the MA with the expectation that the candlesticks will return to above the MA. Looks pretty easy to do? However, wait a minute. Don’t rush to add this indicator immediately before reading below.
How simple but profitable trading strategy with this Moving Average?
As mentioned above, then what needs to be done is to install a minimum of 2 MAs on one chart to see the intersection. MA from greater value will usually be the benchmark for long-term trends, while lower MA will indicate a short-term trend. For more details, see again the picture MA 20 and MA 50 earlier.
Intersections/Crossings of the MAs
From the picture, you can see that the MA 20 (yellow) line always goes up and down over the MA 50 line (red). In the trader’s view, when the MA 20 breaks through the MA 50 from the upward and downward direction, it means that currently there is an option to sell. Especially if the MA 50 direction is also directed downward and the candlestick is always below the two MAs. The bias will remain bearish as long as the candlestick has not reversed direction.
Meanwhile to the contrary, when MA 20 penetrates MA 50 from the bottom towards the top, it means that there is an opportunity to take a buy. It will be stronger if the candlestick stays above both the MA and the slope of the MA 50 is also directed upwards. As long as that still happens, the bias will still be bullish for the relevant currency pair.
The approach to using MA seems easy, and indeed quite easy, but there are always details that are sometimes forgotten and need attention. Weaknesses are also owned by this indicator, which can be read in the text below.
What about the SL and TP?
Stop Loss can be determined mathematically through the percent of loss that can be tolerated from the balance we have (1%, 2% or other amounts) and then converted to pips and lots. Target Profit can be arranged with the same approach. Another way is to use the next intersection as the end of the current order. So, you only order when the intersection of the lines occurs and take profit when the next intersection form.
There is also another option, which is to use the MA line itself as a TP or SL boundary. We can use any MA line as the place for the order we have. Whatever choices of arranging SL and TP, make sure it has been analyzed and in accordance with the trading system that we have. If you are discipline, then this forex trading technique will be consistently profit.
What To Look For In This Trading Technique?
Usually, the candlesticks will be around the MA and make the intersection happen continuously, or the two MA lines will convolute each other. Under these conditions, it is not advisable to trade or order anything because the direction is not yet clear. It is better to wait until the candlesticks are really far from the MA or the two MAs are wide enough so that the trend can be seen more clearly.
Second, difficulty in determining TP and SL. This is because there are no benchmark highs and lows like other indicators. The solution as mentioned above, or by using the round number approach (00, 50) or with the help of resistance support.
To further explore the use of this indicator, it is better to keep doing backtest tests with SL and TP that have been determined. Or, you can test it first in a demo account to see how high the level of accuracy you have. And like other indicators, this indicator is also based on input data within a certain period of time. The more data collected, the higher the level of validity of a data output. In this case, the higher the time frame that we use, the higher the indicator’s accuracy.
MA is one of the basic indicators, it may even be called “mother” of all the other indicators. The right and correct use of the right place will be able to produce simple but profitable trading techniques and also forex trading techniques with consistent profits.