Price Action Trading & Moving Averages
Updated: Feb 6, 2019
If you have spent more than a month in the forex market you will certainly have heard of moving averages.
The moving average is a core technical indicator which is used by a vast number of forex traders, the problem is that most traders use it incorrectly.
Generally, traders look for moving average cross overs as buy or sell signals in other words when one moving average crosses another it is taken as a signal to either buy or sell.
Essentially using this technique alone is useless, whilst it can deliver good results in a trending market, they are inconsistent in ranging markets and generally result in overall loss.
To understand how to use moving averages properly it is important to understand what they were created for, which is to understand market action and price dynamics.
Fundamentally speaking moving averages are used for the following:
1. To identify trends
2. To identify key support and resistance levels
3. To identify price action extremes and climaxes
When properly combined with a concise price action trading strategy, using moving averages these ways can form a foundation of a consistently profitable trading strategy.
An excellent moving average to use for identifying a trend when price action trading is the 21 EMA. 90% of the time when prices hit this EMA in a trending market it will reverse.