Indicators are considered blessings for novice traders. Those who have extensive skills in trading the Forex market, know the important functions of the indicators. They use the most reliable indicators in the market to find the best possible trade signals. In fact, some traders often use indicators to filter out the low-quality trade signals. Since we have tons of indicators in the market, it becomes a very hard choice for us to find the best possible trade signals.
In this article, we are going to teach you the perfect way to use the moving average as it is one of the most prominent indicators in the market. Once you go through this article, we are certain that you will know a lot about the moving average.
Support and resistance level
The moving average can act as a strong support and resistance level. If you set the right period, you will see the price is respecting the moving average in a very simple way. For instance, you may set the period to 200 and use the 200 SMA to find the dynamic support and resistance levels in the market. If the price tests the 200 SMA from a higher point, you should see a decent bounce. On the contrary, if the price test the 200 SMA from a lower point, the 200 SMA will act as a strong resistance level. Though you can use the 200 SMA in any time frame, it would be wise to use it in a higher time frame. By using it in a higher time frame, we will get the unique opportunity to avoid false signals in the market.
Identifying the direction of the trend
The simple moving average is often used to find the direction of the trend. Read more about the functions of the moving average at Saxo and you will know why it is a prominent trend identifier tool. Install the 100-period moving average in your main chart and analyze its slope. If the slope is positive, you should expect a strong bullish rally in the asset. On the contrary, if the slope is negative you may expect a bearish rally in the market. If you take the trades in the cross pair, instead of using the simple moving average, you may use the exponential moving average. The exponential moving average is very sensitive in nature and it prioritizes the most recent changes in the price. Eventually, the traders can find reliable trade signals even in choppy market conditions.
Setting up the pending orders
The professional scalpers often use the 100 and 200-period moving average to set pending orders in the market. By now you know the moving average can act as an excellent support and resistance level. Based on the dynamic support and resistance level, you may set the pending orders at the important levels with a very tight stop loss. However, some conservative traders often rely on the price action confirmation signals. If you take the trades based on the price action confirmation signals, you should be able to earn more money with strong confidence and thus you can become a profitable trader within a short time.
Use as a trade filter tool
Smart traders often use a bunch of moving averages to filter the bad trade signals. While using the moving average as a trade filter tool, it would be wise to rely on the higher time frame. Try to do the data analysis in the major currency pairs as you can avoid many critical issues. Once you become good at using a bunch of moving averages, you will no longer feel tensed after the executions of the trades. Most importantly, you will have a high win rate and thus the profit factor will go higher. So, learn to use the moving average in a very effective way.