There is a saying on trading floors that “the trend is your friend”. It means when you notice a strong trend in a market, trade it, in the direction of the trend. So, if you see an upwards trend, you buy. Likewise, if you see a downward trend, you sell. This is a saying that has stood the test of time and one of the reasons that trend trading is so popular, is because of its simplicity.
What is a trend?
For a trader, a trend is usually a series of higher highs or lower lows on a chart. Currency trading tends to lend itself well to a trend following strategy, given the long term economic pressure that economies face.
Trader and analysts will argue which are the best indicators for trend following, but in reality the best indicators are the ones that you understand and that best suit your strategy. Blindly following indicators is never a sensible option. Neither will any single indicator will be your ticket to fortunes, given that other factors such as risk management are also in play.
Here we will look at arguably the most popular trend indicator there is:
Simple Moving Average – SMA
The moving average indicator helps smooth out the “noise” in price fluctuations, in order to identify a trend. It is calculated by adding the closing prices over X period and then dividing that total by X. For example, for a 10-day simple moving average, you add up the closing prices over the last 10 days and then divide the total by 10. Most charting packages will actually do the calculation for you, but it is worth understanding how it is calculated.
The simple rule is go long when the moving averages are pointing higher and go short when moving averages are pointing lower. Be aware, SMA’s don’t predict, they show what recent past price has done.
The advantage of the SMA is that it produces a smooth line which doesn’t tend to jump around too much, making it good a provider of support and resistance. However, the SMA is slower to respond to quick changes in price. As a result, this indicator tends to be favoured by traders using longer time frames for example using daily or even weekly charts.
Where can I trade forex using trend indicators?
If you are looking to trade using trend indicators such as SMA, it is essential that you choose a forex broker which offers an excellent charting package. Vantage Fx is an award-winning forex broker which provides its clients not with a superior charting package, but some of the lowest spreads and fastest execution in the industry.
