So this time we shall study “moving average”. First, please look at the figure below. What investors think of, when the currency price is on the red circle?
If the current price is the point “A”, many investors would think that “risen enough and it's time to correct the course”, so it's a human nature to take confirm his/her profit as soon as possible and fear to loose his/her profit. If the current price is the point “B”, the opposite situation.
However, in these points there were rising and falling movement and as a result they might miss chances for trading. Therefore, it is important to read trends in order to miss our opportunity for taking profit. The advantage to catch trends is that you can continue in cool blood holding your position regardless of temporary rising or falling movement on the market, if a trend points out upward or downward one.
A way to catch the trade, which traders uses for many years, is “moving average”. The simplest moving average is calculated by the average For example, if you want to know 5-day moving average, you have to calculate all 5-day close price and and divide the sum by 5. But on the trade terminal “NetTradeX” you do not have to calculate it, so the programme automatically does it for you.
There are various figures are used to calculate. 5,6,10,13,20,26,75 and so on. However, on the Internet we usually see the moving average of 5, 10, 20 and so on days.
According to the characteristics of moving average, of course, a short-term moving average is moving closer to current price than long-term moving average. Long-term moving average line should run slower and coming up with the current quotation.
Now, we see, how to use the moving average to define buy and sell signals. It is called “Golden Cross” buy and “Dead Cross” sell.
Golden Cross (buy) is when a short-term moving average passes through a long-term moving average line “from the bottom upwards”, that may mean that "basic trend is changed to upward trend" and you will set "buy" position.
In contrast to it, Dead Cross (sell) is when a short-term passes through a long-term moving average from top downwards, that shows the "underlying trend is changed to downward trend".
On the trend shows that there are large, it is effective when it is visible.
Of course, not all current movement is fit to these rules. In other words, Golden Cross to "sell signal", Dead Cross to "buy signal". One of the reasons, why it occurs, is the period of a using moving average. Every currency pair has its own characteristics, so you have to find proper moving averages.
In IFC Markets Trade Terminal NetTradeX you can easily set any period of moving average and change parameters of it.
