Moving averages are a popular tool used in the foreign exchange (Forex) market to identify trends and make trading decisions. However, many traders and analysts have criticized the reliability of moving averages, arguing that they can produce false signals and lead to costly mistakes. In this essay, we will examine the use of moving averages in the Forex market and explore the reasons for their lack of reliability.
One of the most commonly used moving averages in the Forex market is the 200-day exponential moving average (EMA). This indicator takes the average closing price of a currency pair over the past 200 days and plots it on the chart. The idea behind the 200 EMA is that it acts as a line of support or resistance, and that if the price of the currency pair is above the 200 EMA, it is considered to be in an uptrend, and if it is below the 200 EMA, it is considered to be in a downtrend.
Another commonly used moving average in the Forex market is the 50-day EMA. This indicator is similar to the 200 EMA, but it takes the average closing price of a currency pair over the past 50 days. The 50 EMA is often used as a shorter-term trend indicator and is often used in conjunction with the 200 EMA to help confirm trend direction.
They aren’t always reliable.
Despite the popularity of these moving averages, there are several reasons why they may not be reliable indicators for the Forex market. One of the main reasons is that moving averages are based on past prices, which may not accurately reflect future price movements. Additionally, moving averages are often used as a standalone indicator, which may not provide enough information to make accurate trading decisions.
Another reason for the lack of reliability of moving averages is that they can produce false signals. For example, a currency pair may temporarily move above or below the 200 EMA, but this does not necessarily indicate a trend change. This can lead to traders making incorrect trading decisions based on a false signal.
Furthermore, Moving averages can be affected by the volatility of the currency pairs, and if the volatility is high, the moving averages will be affected, and it will produce more false signals, which can lead to more losses for traders.
Additionally, the use of multiple moving averages can also lead to confusion and conflicting signals. For example, if a currency pair is above the 50 EMA but below the 200 EMA, it may be difficult to determine the true trend direction.
In conclusion, moving averages can be a useful tool for identifying trends in the Forex market, but they are not a reliable indicator for making trading decisions. This is because they are based on past prices, which may not accurately reflect future price movements, and they can produce false signals. Additionally, they can be affected by the volatility of the currency pairs and the use of multiple moving averages can lead to conflicting signals. Traders should use moving averages in conjunction with other indicators and analysis to make more informed trading decisions.
References:
- “200 Day Moving Average Trading Strategy” by David Becker, Investopedia, https://www.investopedia.com/articles/active-trading/052014/200-day-moving-average-trading-strategy.asp
- “The 50 Day Moving Average Trading Strategy” by David Becker, Investopedia, https://www.investopedia.com/articles/active-trading/053115/50-day-moving-average-trading-strategy.asp
- “Why Moving Averages are Lagging Indicators” by David Becker, Investopedia, https://www.investopedia.com/articles/forex/092415/why-moving-aver