A moving average indicator in forex trading is a line in the sand, if you will. It allows you to estimate whether a significant looking movement in price action is likely to continue or reverse.
I’ll show you how to interpret the this, helping you estimate whether the market is likely to keep its direction, or reverse soon.
On this 15 minute chart, price covered a distance of 50+ pips from a high above the MA (moving average) to a low below the MA in just 3 bars. I now have an idea which way to expect price to go next.
Look at this type of price action above and below the moving average indicator in a short period of time. Would you expect price to continue dropping or reverse and go back up?
As I interpret the moving average indicator in this trade, I expect that price will reverse and go back up. The reason is – when it’s been less than 30 bars of time since price was on the opposite side of the moving average, I expect “range” behavior, not continuation in one direction. Here’s what happened next:
In contrast, expect price to continue in one direction (and not reverse) when it holds its position above or below the MA for 30 bars of time.
The next time price makes an aggressive swing through your favorite moving average in a short period of time, you’ll confidently anticipate the reversal!
Beyond moving averages
Want more Forex trading tips? Check out this post: Here’s How to Benefit From Your Expectations About Trend Behavior. If you want to get up-to-the-minute trade alerts via SMS and email, sign up for Trade Alets+ membership today!