A trader’s guide to the best moving average strategies in forex
Find out all you need to know about how to trade FX using moving averages, learn more about SMAs vs EMAs, and check out the five most popular MA indicator FX strategies to try.
What’s on this page?
What is the moving average (MA) indicator?
The moving average (MA) indicator is one of the most used technical indicators for forex traders. It’s a formula used to calculate the averages of a market’s movements over a longer time period (usually weeks or months rather than days) to identify trends, which is vital for a good forex trading strategy.
Why are MAs popular among forex traders?
MAs are popular among forex traders because of the indicator’s ability to collate data from a specific time period into a ‘bird’s eye view’ of recognisable patterns and trends.
Arguably, the most important part of successful forex trading is the ability to foresee the way the market’s going, which is where MAs could come in. By finding out the average price of a market, and seeing how it’s changing over time, forex traders can better predict what their next move might be.
Another benefit of the MA indicator is that, if you want to calculate it manually, it’s relatively easy to do compared to some forex trading mathematical formulas. This is because it’s simply the average of a market’s price over a certain period of time. This also makes it fully customisable, so you can calculate the MA of any time period or any market you want.
How to use MAs in forex trading
There are different ways to use MAs in forex trading, but most commonly these methods focus on trying to find the current or upcoming trends of a forex market.
This involves using MA lines, either the platform-provided indicator or plotting them manually, on a market over a predefined period of time. We offer MA indicators as a standard on all our platforms.
For example, you can use a single MA on a chart to determine if the market is trending up (if its price is consistently above the single MA line) or trending down (if the price is below the MA line).
Simple moving average (SMA) vs exponential moving average (EMA)
There are two main types of MA indicators that are used in forex: the simple moving average (SMA) and the exponential moving average (EMA).
The SMA is just the average price over the whole time period you want to factor in for that market (for example, 100 days). To calculate it, you’d add the closing prices of those 100 days and divide the total by 100.
However, markets react to news and current events, which can mean that an SMA can only give you half the picture. Enter exponential moving averages (EMA), which also calculate a market’s average price but gives far more weight to the most recent price changes and less weight to older ones.
Create or log in to your trading account and go to the platform
To do so, open a live account via our online form – you could be ready to trade in minutes and there’s no obligation to add funds until you want to place a trade.
Not ready to trade with real money just yet? You can also practise trading first in our risk-free demo account, which gives you £10,000 to help hone your strategy.
Find the currency pair you want to trade
Forex is the world’s most traded market, and our platform has more than 80 global currency pairs to trade. These include many forex ones, from major currency pairs like the EUR/USD to minor ones and even exotic pairs like the HUF/EUR.
This means that your first step is to find the right currency pair to suit your trading style and goals. Ensure you do detailed fundamental analysis and technical analysis on the currencies and that you understand how both move in relation to each other.
Select ‘buy’ or ‘sell’ in the deal ticket
Once you have an account (or demo) and know which currency pair you want to trade, it’s time for you to decide whether to ‘buy’ or ‘sell’.
You’d go long or ‘buy’ the pair if you expected the base currency to rise in value against the other or ‘quote’ currency.
If you expected the base currency to fall in value against the quote, you would instead go short or click ‘sell’ in the deal ticket.
Choose your position size and take steps to manage your risk
Once you’ve clicked ‘buy’ or ‘sell’, it’s time to choose your deal size. In the spread betting platform, this’ll be your bet size per point and in CFD trading it’ll be the number of contracts bought or sold.
Also, forex is traded in lots, which are batches of currency used to standardise forex trades. A standard lot size is 100,000 units, while a micro lot is 1000 units.
You’ll then need to set your stops and limits as part of your strategy to manage your risk – an especially important step with the volatility of forex trading.
A stop or stop loss will close your position automatically if the market moves against you by a certain amount. Note that normal stops do not protect against slippage.
Guaranteed stops, on the other hand, do protect against slippage and will always be closed out at exactly the price you specified. These carry a small fee if triggered.
Limit orders, or limits, can help lock in your profits by automatically closing a trade once it reaches your desired price level.
Open and monitor your trade
Once you’ve set stops and limits to manage your risk, all that’s left to do is click ‘place deal’ in the deal ticket to open your position.
After you’ve opened your position, you can monitor your trade in the ‘open positions’ section of the dealing platform. You can also set price alerts to receive email, SMS or push notifications when a specified buy or sell percentage or point is reached.
When you are comfortable with your trade’s amount of profit or loss and want to close the position, simply open it in the ‘positions’ tab of the platform and click ‘close’. Alternatively, you can reverse the trade to close your position. This means selecting ‘sell’ if you bought or ‘buy’ if you sold.
The single MA cross
MAs empower beginner forex traders by making the often-bewilderingly volatile world of forex easy to visualise, with identifiable patterns that show the possible best time to buy and sell.
The most iconic of these is the ‘cross’. To follow this strategy, you’ll plot or enter a single MA line into your trading chart and choose your time period 0 for example a 10, 20, 50, 100 or 200-period. This’ll give you a single MA line that time period and you will also see the current price.
When the current price of that forex market crosses your MA line from below, this is known as a ‘golden cross’ or a bullish cross, and it could be a sign that it’s time to buy. When the price crosses your MA line from above, it’s called the ‘death cross’ or bearish cross and it could be a sign to sell.
This is an accessible, no-bells-and-whistles MA strategy that is easy to follow and understand for even the greenest of forex beginners, although it’s far from foolproof as it does not take into account a lot market context, such as current events in the news.
The double MA cross
One way around this is to use two MA lines, one for a longer time frame and one more short term. In this strategy, the longer MA line will give you a ‘long view’ of that market’s price, while the shorter one will showcase more recent changes in pricing, from things like current events.
With this strategy, you will still look for crossovers, but with your two MA lines rather than the current price and one ma. When the shorter MA comes from below and crosses above the longer MA line, this is considered a golden cross or bullish cross (and it’s time to buy, as in our previous strategy). When the shorter MA comes from above and crosses to below the longer MA, this is a death cross or bearish cross and considered a sign to sell.
The MACD strategy
One of the most popular ways to trade MAs is the moving average convergence divergence histogram – known as the ‘MACD’. The MACD is an indicator we offer on our platforms and is useful as a momentum indicator.
The MACD is made up of two EMAs and a histogram. What you’re looking for with the MACD is either convergence (when the two EMA lines connect) or divergence (when the two EMAs pull away from each other).
There are many different strategies within the MACD strategy. For example, you can trade using a crossover strategy, which is similar to the crosses in that you’d buy when the shorter MACD line crosses the longer signal line from below, or selling when the MACD line crosses the signal line from above.
The drawback of using the above two strategies is that, in the volatile and fast-changing world of forex, a trend can change suddenly and unpredictably. The ‘envelope’ strategy seeks to mitigate the risks of this by adding additional bands or ‘filters’ around the MA line.
If using the envelope strategy, you’d place two filters at calculated points above and below the MA line – for example 1% above and below the MA, or filters at 5% above and below. These provide additional lines of support and resistance for the current price to break through, which will show if the trend has staying power or not.
With an envelope, most forex traders will only trade a bullish or golden cross if the price also crosses the line above the MA or, likewise, sell if the price crosses beneath the line below.
If the two EMA lines of the envelope strategy is not enough for you, you may want to try the ribbon strategy. Using the ribbon forex trading strategy consists of having several EMA or SMA lines, usually somewhere around 10, of varying timeframes on the same chart.
This creates a ribbon-like chart that can tell traders a number of things more simple MA charts with less lines cannot. For instance, when using EMAs, a ribbon strategy can give a good idea of the strength and potential longevity of a trend. While one or two of the MA lines for the shorter periods may first pick up a trend, the longer-term lines can confirm or call it into question.
The ribbon strategy is popular due to its flexibility. You can customise your own ribbon by choosing how many MA lines you want and whether they should be SMAs or EMAs.
As with many other strategies, you’d look for crossovers. However, with the ribbon strategy there are bound to be many more of these – and the more lines you’ve chosen, the more crossovers will occur. This can be overwhelming for inexperienced traders.
Forex moving averages strategies summed up
- A moving average (MA) is a popular technical indicator used by many forex traders
- Most commonly, moving average indicators are used to help traders recognise patterns and trends in the forex market
- These are either plotted manually on a chart or the trader uses the MA indicators provided in their chosen platform – we provide several MA indicators on our platform
- The two most common forms of moving averages are the simple moving average (SMA) and the exponential moving average (EMA)
- While there are many strategies involving moving average lines, there are a few key moving average strategies for beginner forex traders to know
- The top five most popular of these include the simple crossover strategy or ‘single MA cross’, the double cross, the MACD (moving average convergence divergence) strategy, the envelope strategy and the ribbon strategy
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