Using Moving Average in Trading

Expert:  Valeria Bednarik, Trader College LLC and True Market LLC 
 
Topics that will be covered for above session are: 

•   What is a Moving Average
•   Different ways to work with simple moving average(MA)
•   How to use a exponential moving average (EMA)

Who is Valeria Bednarik?

Valeria has been an active Forex trader for the last 2 years, specializing in the International Foreign Exchange Market. She also graduates in the Universidad Catolica del Salvador, in Argentina, as a Public Account, specializing in financials and cost managements. She actually manages an important clients portfolio for IFX Markets, Boston and is trader at Trader College LLC.

Sessión Material

How to use MOVING AVERAGES simple and exponential
What is a Moving Average?

Moving averages are trend direction indicators that calculate a simple arithmetic average of prices for a specified period, showing the average value of the price of a currency over a set of value.

There are different types of MA:  we use SMA for simple moving averages and EMA for exponential ones. There are also two more kinds of MA: smoothed and line weighted.

The SMA is the simplest one, yet the most used. It calculates the average of the price by adding the prices of the specified period together then divides it by the number of the prices.
SMA = Sum of “x” periods /X

Where x represent a certain number (could be almost any one from 2 to 500 depending of how many historical information your charts include); besides, many chats allows to select a chosen set to apply the calculation: Open, close, high, low, median or typical price, etc.

The EMA, smoothes the MA by adding to the current closing price, the previous value and giving the last prices more weighted value. This type of MA reacts faster to recent price changes than SMA

The Smoothed MA smoothes the SMA by giving the recent prices an equal weighted to the historic ones. It’s recommended to use it with long term periods to get better result.

The Linear Weighted MA smoothes the SMA, by giving the latest data more weighted value than to more early data. That helps to limit the effect of the price fluctuations of the recent price.

Let’s remind that MAs works better in a trend market and they act worst in periods of  market fluctuations.

Different ways to trade with MA

There are many different methods and settings of Moving Averages a trader can use; in this session, we will include just two methods, with some of the common settings, useful for intraday trading. 

On first place, we can use a MOVING AVERAGE BREAKOUT. In this method, you have to draw a Ma in any selected chart. Let’s see an example in a 1 hour chart of EUR/USD. I used a SMA of 20 periods (blue). When the price crosses the Moving Average down-up and there’s a new candle opening above the Moving Average indicator we buy, an when the price crosses the Moving Average up-down and there’s a new candle opening below the Moving Average indicator we Sell.

Clic image to enlarge - Chart 1 EUR/USD 1 hour

Another way to trade MAs, is using MOVING AVERAGES CROSSES. In this method, you can use at least two MA, but here at Trader College we generally use three. The first one will be set with a small period (Fast Moving Average) the second one will be set with more number of periods ant the third even with a bigger number of them (Slow Moving Average). Let’ see another example using SMA of 4, 9 and 18 periods in a 4 hours USD/JPY chart

Clic image to enlarge - Chart 2 USD/JPY 4 hours chart

The sky blue is a 4 periods MA, the medium blue represents 9 periods, and the dark one, is for 18 periods. See how, when 4 cuts 9 and then, cuts 18 you have a good trigger. The 4 periods line crossing the 9 ones, is the first signal you have; this signal gets its confirmation when both, 4 and 9 cross 18.

There are lots of combinations we can use to trade using Ma or EMA. Another good combination is 9 13 34. The most important thing to remember is that this particular indicator works better when the market is at a defined trend.

EMA as dynamic supports and resistances

Another way to use EMA, not only as a signal or trigger, is use large ones (50, 60,200), as dynamic supports and resistance for the intraday trading. Of course, as day go by, numbers change, because as I say this is a dynamic indicator. The way to use them, is to check them in a 4 hours chart; with observation you will find out, that generally, prices rebound or stop near that point. You can use them as target prices too.

But take notice, when this EMA are broke, let’s say, for more than the 8% of the pips a certain currency moves a day, that probably means a change of status: if it was a support, then turns in to resistance, and vice versa.

Check the following GBP 4 hours chart.

Clic image to enlarge - Chart 3: USD/GBP 4 hours

The blue line, is a 200 EMA. The yellow, a 60 periods EMA. See how currency spends a good number of hours “fighting” them, until giving a  trend confirmation. 

No matter what system you use to trade, no matter what indicator, always remember two things: do your own back testing, and try to keep it as simple as possible. If you do your own back testing, you will feel confident, as you understand better the currencies behavior; if you keep it simple, you won’t get dizzy with thousands of different signals.

Speech Material

FXstreet Moderador (Jun 9, 2006 8:28:25 AM)
Good morning, good afternoon, and good evening to all of you joining us today from different parts of the world. Welcome to today's Live Forex Expert Question and Answers session.

FXstreet Moderador (Jun 9, 2006 8:46:42 AM)
Thank you for joining today’s session. We will begin with the pre-registered users’ Questions in approximately 5 minutes. Meanwhile please read the text speech that you will find on the left of this chat window. Thank you for your participation.

FXstreet Moderador (Jun 9, 2006 8:52:19 AM)
This Q&A Sessions allows users to start asking live questions from the very first moment of the chat.

FXstreet Moderador (Jun 9, 2006 8:52:32 AM)
Our guest host will first start answering a selection of the pre-registered user’s questions, and then he/she will answer live Questions sent to the FXstreet Moderator during the course of the session.

FXstreet Moderador (Jun 9, 2006 8:52:55 AM)
Today expert is Valeria Bednarik, Trader College LLC and True Market LLC. Please prepare any questions you may have for the expert.

FXstreet Moderador (Jun 9, 2006 8:55:15 AM)
Thank you for joining today’s Q&A Session.

FXstreet Moderador (Jun 9, 2006 8:55:30 AM)
Welcome to the Session. Today I am delighted to welcome our guest speaker Valeria Bednarik, Trader College LLC and True Market LLC

Valeria Bednarik - Trader College (Jun 9, 2006 8:56:13 AM)
Good morning, good afternoon or good evening. My name is Valeria Bednarik,

Valeria Bednarik - Trader College (Jun 9, 2006 8:56:34 AM)
and I’m very please to be with you here, today. Feel free to ask what ever you like about this particular subjet in Forex trading.

Valeria Bednarik - Trader College (Jun 9, 2006 8:56:45 AM)
We have some pre registered questions. Let’s start with them.

Valeria Bednarik - Trader College (Jun 9, 2006 8:56:57 AM)
Q: what setup you recommend for intraday trading? aaezz2000@

Valeria Bednarik - Trader College (Jun 9, 2006 8:57:21 AM)
A: Well, for intraday trading I personally prefer a combination of at least 3 different moving averages. As I explain in the text, you can use 4 9 18 Ma or 5 13 55 EMA. This last one will give less signals, but more strong ones

Valeria Bednarik - Trader College (Jun 9, 2006 8:57:45 AM)
Q: I use the 20 & 65 SMA to determine when a strong trend is in place .Could u tell me if this combination is appropriate for the hourly charts as it concerns trends( whether bullish or bearish). if not was is more appropriate. blackie_mabs@

Valeria Bednarik - Trader College (Jun 9, 2006 8:57:58 AM)
Yes, I think thay it could be a right combination in hour chart. Maybe, you will have not many signals per day, but those signals will be strong.

Valeria Bednarik - Trader College (Jun 9, 2006 8:58:15 AM)
Q: What time periods do you belive are best for FX trading? energydave@

Valeria Bednarik - Trader College (Jun 9, 2006 8:58:30 AM)
A: That depends on your trading strategy. If you trade intraday, you could look for the day trend in a 4 hours chart, so as to find out where is the day going, and trade in 1 hour or 30 minutes charts.

Valeria Bednarik - Trader College (Jun 9, 2006 8:58:44 AM)
If you are a long term trader, them, do the same with bigger charts: check the trend in weeks or month charts, and trade in a 1 day one

Valeria Bednarik - Trader College (Jun 9, 2006 8:58:59 AM)
Q: Is there any guide line to follow with regards to time frames? ecebrook@

Valeria Bednarik - Trader College (Jun 9, 2006 8:59:37 AM)
A: Yes of course. As in the above question, depending on your trading strategy use bigger charts to find the major trend, and use smaller ones to trade.

Valeria Bednarik - Trader College (Jun 9, 2006 8:59:56 AM)
Q: what are moving averages? How are they applied? anointedtrader@

Valeria Bednarik - Trader College (Jun 9, 2006 9:00:27 AM)
A: As I explain in the text, moving averages are just another indicator you can use to trade. They are an average value of the price of a certain currency over a determinate sum of periods. As they are trend followers, they will help you showing the trend

Valeria Bednarik - Trader College (Jun 9, 2006 9:00:37 AM)
, and it’s changes. About how to use them, well, you can work with MA breaks (as bigger as better) or MA Crosses, using Slows (bigger number of periods) and Fasts ones (short number of periods).

Valeria Bednarik - Trader College (Jun 9, 2006 9:01:01 AM)
The following two questions are similar, so I will give answer them togheter

Valeria Bednarik - Trader College (Jun 9, 2006 9:01:09 AM)
Q : Which is the best indicators between MA and EMA ? Is it better to see all of indicators in the same time or just one? Thank you. P.S. I am a beginner in this area of trading pls2ster@

Valeria Bednarik - Trader College (Jun 9, 2006 9:01:39 AM)
Q: I would like to know... Does diff. time frame, has different EMA SMA setups? if so, for 15-min charts which EMA/SMA crossover set is widely used...? thanks, kevink134@

Valeria Bednarik - Trader College (Jun 9, 2006 9:02:03 AM)
A: Well, that’s a good question, and of course, depends on each trader strategy. If you use the same set of MA 4 9 18 for example in all time frames, then as smaller the chart (15 minutes) you will have lots of signals, but not all as good.

Valeria Bednarik - Trader College (Jun 9, 2006 9:02:17 AM)
If you keep the same set in a 4 hours chart, then you will have less signals, but of course, better ones. You need to adjust your system to your needs, but in smaller charts, you have to set bigger MA to have good signals.

Valeria Bednarik - Trader College (Jun 9, 2006 9:02:37 AM)
Q: How moving average helps in forex market? sobhanbd@

Valeria Bednarik - Trader College (Jun 9, 2006 9:03:05 AM)
A: As you can see in the text, moving averages help in many different ways. They show you the trend, they can be use as a trigger when they cross or are broken and even as dynamic support and resistances, like EMA 60 or 200.

Valeria Bednarik - Trader College (Jun 9, 2006 9:03:19 AM)
Q: what is your opinion regarding moving average cross over signals for buy and sell points? thomasrjones@

Valeria Bednarik - Trader College (Jun 9, 2006 9:03:43 AM)
A: You will have your entry point when one ma cross the other ma, and you have a confirmation. This means, you have to wait the next candle, and this candle have to open above or under the ma cross

Valeria Bednarik - Trader College (Jun 9, 2006 9:03:59 AM)
ok that's all for pre registered questions.

FXstreet Moderador (Jun 9, 2006 9:05:32 AM)
Thank your for that.

FXstreet Moderador (Jun 9, 2006 9:05:41 AM)
NOW, the expert will answer all live Questions sent to the FXstreet Moderator during the course of the session.

rvtrader3 (Jun 9, 2006 9:06:11 AM)
wich ema do you think can we use for four hours charts?

Valeria Bednarik - Trader College (Jun 9, 2006 9:06:35 AM)
Well depending for what do you wan to use them

Valeria Bednarik - Trader College (Jun 9, 2006 9:06:54 AM)
If you want to use them as dynamic support and resistance, we recomend uysing 60 and 200

Valeria Bednarik - Trader College (Jun 9, 2006 9:07:43 AM)
if you want to use them as indicator to get signals of trading

Valeria Bednarik - Trader College (Jun 9, 2006 9:07:59 AM)
you can combine EMa of 5 13 and 34 in a four hours chart.

Valeria Bednarik - Trader College (Jun 9, 2006 9:08:11 AM)
that will give you a good trading system

Valeria Bednarik - Trader College (Jun 9, 2006 9:09:24 AM)
you can filter it, with any indicator you like, like momentu, cci, rsi or macd... just choose ONE, not more

nick (Jun 9, 2006 9:09:34 AM)
How do we recognise a good ma cross?

Valeria Bednarik - Trader College (Jun 9, 2006 9:10:32 AM)
well, if you are using 2 or 3 Ma, you can say there is a good cross, forst, when they all tend to the same way,

Valeria Bednarik - Trader College (Jun 9, 2006 9:10:52 AM)
then, you have to see how is the cut

Valeria Bednarik - Trader College (Jun 9, 2006 9:11:08 AM)
as bigger the angle, then the better the signal

Valeria Bednarik - Trader College (Jun 9, 2006 9:11:45 AM)
in any indicatorthat use crosses, the best signals depend on the larger angle

rvtrader3 (Jun 9, 2006 9:12:10 AM)
what about 144? why

Valeria Bednarik - Trader College (Jun 9, 2006 9:12:43 AM)
Well, good question

Valeria Bednarik - Trader College (Jun 9, 2006 9:13:31 AM)
that's a Fibonacci number.. and i like very much using Fibonacci

Valeria Bednarik - Trader College (Jun 9, 2006 9:14:11 AM)
Fibonacci numbers are significant numbers. He based all his theories in natural phenomenos

Valeria Bednarik - Trader College (Jun 9, 2006 9:15:02 AM)
see, another Fibonnaci number, like 13 or 21 will give you agood cross.

Valeria Bednarik - Trader College (Jun 9, 2006 9:15:38 AM)
in Fact, we also use, as support and resistance, EMA of 55 and 233 who are also Fibonacci numbers.

coltrane (Jun 9, 2006 9:16:25 AM)
what signals do u use to exit trades do u use same cross overs

Valeria Bednarik - Trader College (Jun 9, 2006 9:17:33 AM)
Well in fact, that would be a signal of reversion of the trend, and so, a good point to close your trade

Valeria Bednarik - Trader College (Jun 9, 2006 9:18:06 AM)
but to be sincere, I try not to be long in to the market.

Valeria Bednarik - Trader College (Jun 9, 2006 9:18:52 AM)
I don't wait to get the maximun profit. I use to close my trades with between 15 and 30 pips

Valeria Bednarik - Trader College (Jun 9, 2006 9:19:59 AM)
I prefer to insurance my winins... and get control of my greed, but of course that's a personal position

nick (Jun 9, 2006 9:20:30 AM)
do you recommend using other indicators to support what you have just mentioned using 5, 13 and 34 emas

Valeria Bednarik - Trader College (Jun 9, 2006 9:22:00 AM)
Yes sure. you have to find a balance. you have to use une indicator as signal or trigger, and another one, to filter that signal.

Valeria Bednarik - Trader College (Jun 9, 2006 9:22:25 AM)
I personally recomend, not to use like we many of us do when we start

Valeria Bednarik - Trader College (Jun 9, 2006 9:22:56 AM)
a chart full of lines and indicators, where you can hardly see the price.

Valeria Bednarik - Trader College (Jun 9, 2006 9:23:42 AM)
try to find a system wher you feel confortable, and follow the trend

Foghog (Jun 9, 2006 9:26:29 AM)
What is your success rate using ma's ??

Valeria Bednarik - Trader College (Jun 9, 2006 9:27:24 AM)
Well, I use them only with JPY as signal or trigger.

Valeria Bednarik - Trader College (Jun 9, 2006 9:27:48 AM)
and in another currencies, like EUR or GBP as dynamic support and resistance.

Valeria Bednarik - Trader College (Jun 9, 2006 9:28:10 AM)
The rate is nearly the 80 % , and that's a very good rate.

Valeria Bednarik - Trader College (Jun 9, 2006 9:28:31 AM)
You have to find a strategy, a system, in a certain time frame,

Valeria Bednarik - Trader College (Jun 9, 2006 9:28:59 AM)
and do your own backtesting, in order to feel confident with it

Valeria Bednarik - Trader College (Jun 9, 2006 9:29:23 AM)
To do your backtesting, you have to check at least the last 100 crosses

Valeria Bednarik - Trader College (Jun 9, 2006 9:29:41 AM)
and, taking notice if you are following the trend or against it

Valeria Bednarik - Trader College (Jun 9, 2006 9:29:58 AM)
see how the MA crosses work

Valeria Bednarik - Trader College (Jun 9, 2006 9:30:21 AM)
Of course, you can base your trade in anothers work. We all tend to do it.

Valeria Bednarik - Trader College (Jun 9, 2006 9:30:45 AM)
But doing your own backtesting, you will feel sure that you are doing right

Valeria Bednarik - Trader College (Jun 9, 2006 9:31:07 AM)
this will help you too to set your limits and stop loss

coltrane (Jun 9, 2006 9:31:30 AM)
how do u decide on a target to exit

Valeria Bednarik - Trader College (Jun 9, 2006 9:32:22 AM)
As i say before, I'm happy with a certain number of points, between 15 and 30. But

Valeria Bednarik - Trader College (Jun 9, 2006 9:32:59 AM)
you in a fast movement, in intraday trading you can use EMA as target point

Valeria Bednarik - Trader College (Jun 9, 2006 9:33:19 AM)
Price tend to rebound in those dynamic lines.

Valeria Bednarik - Trader College (Jun 9, 2006 9:33:38 AM)
If you are a long term trader, your exit point

Valeria Bednarik - Trader College (Jun 9, 2006 9:34:27 AM)
will be a change in the Ma cross (if you are bull a up- down cross)

Valeria Bednarik - Trader College (Jun 9, 2006 9:34:48 AM)
that will be a signal of a probable change in the trend you are following

Jolly (Jun 9, 2006 9:35:02 AM)
I have been using 5/13/82 on a 30 min chart. Is that good?

Jolly (Jun 9, 2006 9:36:38 AM)
Correction--5/13/62

Valeria Bednarik - Trader College (Jun 9, 2006 9:36:40 AM)
I never use that combination... but I guess is a good one, because a 82 is long enough for that time frame

Valeria Bednarik - Trader College (Jun 9, 2006 9:37:08 AM)
ok

Valeria Bednarik - Trader College (Jun 9, 2006 9:37:31 AM)
try to use 55 or 88 who are Fibonacci numbers like 5 and 13

Valeria Bednarik - Trader College (Jun 9, 2006 9:38:05 AM)
and look where the trend is going, in a 4 hours chart

FXstreet Moderador (Jun 9, 2006 9:38:52 AM)
Last Question

DC (Jun 9, 2006 9:39:11 AM)
How do you correlate a given set of MAs on different time frames

Valeria Bednarik - Trader College (Jun 9, 2006 9:40:19 AM)
Well

Valeria Bednarik - Trader College (Jun 9, 2006 9:41:28 AM)
as I say before, you can use the same set for all time frames, but in smaller the charts you will have lots of signals, not all them good.

Valeria Bednarik - Trader College (Jun 9, 2006 9:41:43 AM)
in bigger charts, you will have less signals, but better ones.

Valeria Bednarik - Trader College (Jun 9, 2006 9:41:56 AM)
Try to define a time frame where you will work

Valeria Bednarik - Trader College (Jun 9, 2006 9:42:09 AM)
and determinate a certain set to aply to that one

Valeria Bednarik - Trader College (Jun 9, 2006 9:42:25 AM)
as smaller the chart,

Valeria Bednarik - Trader College (Jun 9, 2006 9:42:45 AM)
the bigger the M Aor EMas must be to get good signals.

FXstreet Moderador (Jun 9, 2006 9:43:26 AM)
That’s all we have time for Today .

FXstreet Moderador (Jun 9, 2006 9:43:31 AM)
Thank you very much for that Valeria Bednarik

Valeria Bednarik - Trader College (Jun 9, 2006 9:44:14 AM)
Thank all of you for being here today. If you have any question regarding to this subjet

Valeria Bednarik - Trader College (Jun 9, 2006 9:44:28 AM)
you can send me an email to vbednarik@ciudad.com. ar

Valeria Bednarik - Trader College (Jun 9, 2006 9:44:38 AM)
or info@tcollegeweb.com

Valeria Bednarik - Trader College (Jun 9, 2006 9:44:47 AM)
i will be glad to answer them

Valeria Bednarik - Trader College (Jun 9, 2006 9:44:59 AM)
See you soon

FXstreet Moderador (Jun 9, 2006 9:45:19 AM)
Thank you all for your participation. See you soon!