2) As an indicator of general trend based on the 2 different moving averages:
- Moving averages of different lengths represent a general price of different degree. For example, the 21-SMA represents short-term mean price action versus the 200-SMA, which represents a long-term mean price action.
- A crossover between a shorter to a longer term moving average (ie. 55 SMA crossing 100 SMA) reflects a change in trend. Meanwhile, if the distance between the 2 moving averages are spreading, we should see continuing progression and strengthening of a trend.
Because of the lag, if the market is not trend and choppy, the signals will be too late and false. Here is an example of the EUR/GBP with a couple of late and false signals, before a late but signal that still was followed through:
In construction of other indicators:
Fan Yang CMT is the Chief Technical Strategist FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.
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