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.
Here is an example of the EUR/GBP Daily chart taken for price action from end of April towards the end of June.
Red is 55SMA, Blue/Violet is 100SMA: Note the crossover reflecting the change in trend of the market, but also note that this crossover happens with a lag after the market already turned:
False Crossover Signals During Range:
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:
Parts 1-7:
1) As an indicator of general trend relative to price
2) As an indicator of general trend based on the 2 different moving averages
3) Other multiple moving average systems
In construction of other indicators:
4) MACD
5) MA envelop – Bollinger Band
6) Horizontal shift; in Ichimoku Charts
7) “Smoothing Out” other Indicators ie. Stochastic Oscillator
Fan Yang CMT is the Chief Technical Strategist FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.
