How to Determine the Trend Using Moving Average
One of the Moving Average (MA) functions is to help us determine a trend of price movements. And the way is very easy, that is plot the moving average into a price chart when the price moves above the moving average, then it can be said that the price is in an uptrend condition and if the opposite is the price below the moving average it is said that the price is in a downtrend.
There is one problem when using this moving average that is too simple this tool. So that when there is a problem such as when there is a jump in prices for a moment due to economic news we can get an invalid signal.
For example is the price movement of USD / JPY which tends to be a downtrend but suddenly there is a news that causes prices to soar for a moment as below.
as we see due to economic news the price movement is above the moving average and you will think that the price will turn from a downtrend to an uptrend so you say “Hmmmm it’s time to open a BUY position” but wait what happens with the next move …
Hehehe turns out you are mistaken that the trader only responds to the economic news for a moment and the price continues to decline below the moving average. And if you rush to open a BUY position you will definitely be disappointed because you are getting a fake signal.
And what should we do to avoid being trapped by this false signal. Hmmm the way is by plotting two moving averages that are different periods, namely fast periods and slower periods. This is used to ensure that we do not take decisions too quickly to open a position before the confirmation signal. The explanation is as follows:
In price movements tend to uptrend the moving average which is faster than the slower moving average and vice versa in downtrend. An example is when we have a moving average with periods of 10 high schools and 20 high schools, the graph will look like:
Above is the price movement of the USD / JPY currency pair and as we see that the price is in an uptrend condition marked by 10 SMA above 20 SMA .
You can use this combination of faster and slower moving averages to determine whether the price is in an uptrend or downtrend. You can also combine with the knowledge and trading experience that you have been doing to get optimal results.