Getting an idea of currency market sentiment

When it comes to forex trading — or any kind of trading for that matter — it is important to be able to have some of analysis that can help you spot trends and create better informed trading strategy. One of the ways that you can use technical analysis to your advantage in forex trading is to study moving averages.

Moving averages

Moving averages are used in all markets analyses — not just analysis of the currency market. Moving averages demonstrate the sentiment of the currency market, giving you an idea of where a currency pair is heading overall. The idea is to use long term trends in order to figure out where a currency pair is might be going so that you can plan your position entrances and exits accordingly. A trend line is created that smooths the appearance of the chart and makes it easier to interpret.

Investopedia offers an example of a moving average:

Typically, upward momentum is confirmed when a short-term average (e.g.15-day) crosses above a longer-term average (e.g. 50-day). Downward momentum is confirmed when a short-term average crosses below a long-term average.

You can see it illustrated below:

Naturally, a moving average cannot completely predict where the currency market is heading. Forex trading is volatile, and sudden changes are the norm. But moving averages can help you get an overall idea of the general direction of the currency market, and can help you identify when a change might be coming.