How to trade forex using moving averages

Written by
Krisztián G.
Fact checked by
Tamás D.
Updated
Apr 2024

A moving average is a statistical calculation used to analyze data points. When using this method, you will create a series of averages of the different subsets of the full data set. In forex trading, moving averages are a commonly used technical indicator designed to help identify potential trends.

The essence

  • Moving averages help identify potential trends
  • There are several types of moving averages and they differ in their sensitivity to changes in the underlying data 
  • Moving averages do not predict the direction of prices
  • Forex traders typically use moving averges as a supporting tool for trading decisions

How to trade forex with moving averages

 

The basic idea behind a moving averages is calculating the average price of a currency pair over a specified number of periods (such as days, weeks, or months). This average is then plotted on a chart, allowing traders to analyze and identify trends in the market.

Traders use moving averages in forex to smooth out short-term price fluctuations and identify the current market trend. By calculating the average price of a currency pair over a specified time period, traders can get a clearer picture of the underlying trend (i.e. filter out the noise in the market) and make more informed trading decisions. 

There are several types of moving averages used in forex trading, including simple moving averages (SMA), exponential moving averages (EMA), and weighted moving averages (WMA). The main difference between them is the sensitivity that each shows to changes in the data used.

Traders select the type of moving average and the time period they use based on their trading style and the specific market conditions they want to analyze.

If the exchange rate of a currency pair stays mostly above the moving average, it suggests an uptrend in the market. Conversely, if the price remains mostly below the moving average, it indicates a downtrend.

Moving averages do not predict the direction of prices, they only define the current market direction with a delay. They are called a lagging or reactive indicator because they reflect events that have already happened. Since they are not crystal balls that tell you where the price will go, use moving averages only as a supporting tool for making trading decisions.

If you are new to forex trading, we recommend you open a demo account to practice trading with moving averages and to build your own strategy. Most of the brokers featured in our list of the best forex brokers in the world provide a demo account free of charge. Our analyst team compiled the top list after testing each broker's services with real money. 

Example of using moving averages in forex

Here's a practical example of using a moving average on the EUR/USD currency pair.

Let’s assume that you want to trade the EUR/USD pair and want to get a feel of what the trend is in the market. You should use a daily chart and set a 100-day moving average. Once you transpose the moving average on your chart that shows the EUR/USD exchange rate, you will be able to see the main trend. If the EUR/USD price is above the moving average line, it may indicate an uptrend, and if the price is below the moving average line, it may indicate a downtrend. Based on the analysis of the chart and the trends identified, you can decide on whether to buy or sell the EUR/USD currency pair.

This is a simple example of how to use a moving average in forex trading. Keep in mind that this is just one of many technical indicators that traders use to make decisions.

FAQ

What is the best moving average to use in forex?

The ideal moving average period to use in forex trading depends on the trader's horizon. For short-term trades, the most effective periods are 5, 10, and 20. However, for longer-term trading, the best periods are 50, 100, and 200.

Does moving average work in forex?

Most forex traders use moving averages in their strategy, as they are useful in supporting  trading decisions on a long-term horizon.

How do you use moving averages in forex?

The simplest way is to plot a single moving average on the chart. If the price stays mostly above the moving average, it suggests an uptrend in the market. Conversely, if the price remains mostly below the moving average, it indicates a downtrend.

 

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Krisztián Gátonyi
Author of this article
I have 15 years of experience in proprietary trading, mainly in the interbank currency market as a foreign exchange risk manager. I'm actively involved in reviewing the 100+ brokers listed on our site. I personally open accounts with real money, execute trades, test customer services. I hold an MSc in International Business from the University of Middlesex. My purpose is to help people find the best investment provider.
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