FX UK and Moving Averages
When you use a moving average in your FX UK trading you have to keep a few things in mind. The moving average usually takes the closing price into the calculation but this is not always the case. There are times when the moving average is calculated using the open, high, close, median and low. While these might seem to be slight differences they can affect your analysis.
The Appropriate Time Periods
Moving averages generally represent the daily prices of the currency pair, but the time frame does not actually have to be days. It is possible to calculate moving averages using minutes, hours and weeks. There are some traders who use moving averages that have been created using monthly, quarterly and yearly data. The type of trading you are completing will affect the time frame you should be using. Day traders should pay more attention to the 50 minute average than the 50 day average.
FX UK Moving Averages are not Foolproof
Nothing on the forex market is guaranteed and this relates to technical indicators as well. One of the biggest problems with a moving average is that they cannot do much for the trader is the pair is trending sideways. When this happens the averages you see will be hard to decipher and not very clear.
Action Price Response
Traders who often use moving averages know that there is a problem with action price response. You have to set up the average so it responds to changes in the trend, but you do not want it to be too sensitive. Increased sensitivity can cause false signals and cause the trader to enter and exit trades prematurely. It is recommended that traders use other technical indicators to verify any moves predicted through the use of a moving average.
While moving averages are lagging indicators you have to be very careful about how the lag affects your trades. The transaction signal the average creates always comes about after the market has moved. This lagging generally works against the trader causing you to enter the trade at the worst possible time. The main problem with this is that by the time the transaction signal comes about the price has already experienced the expected movement.
Signal and Trigger Lines
It is possible to create moving averages from any data that regularly changes. This means that it is possible to create a moving average on the MACD. One way to do this is to create a 9 period EMA based on the values of the MACD. When the value of the indicator crosses over the signal line a trading signal is created. When the EMA crosses above the signal line this is buy signal and when it crosses under the signal line this is the sell signal.
Bollinger Bands actually appear to be very similar to moving average envelopes. However, the main difference is in the way that the out bands are created. The bands with this indicator are created using 2 standard deviations away from the moving average. Moves toward the upper band means the currency is overbought and moves to the lower band means the currency is oversold.
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