The most commonly used technical indicator on the forex market is the moving average. While this is a popular indicator there are a number of problems that come with it. If you are going to use this indicator on your forex charts you need to know about the problems you can face. When you know about the problems you can prepare for them and avoid some of them. Of course, there is no way to avoid all of the problems that come with moving averages.
The Information from Forex Charts
The first problem that a lot of traders have with moving averages is that they are a lagging indicator. This means that all the information they are using is historic. This historic view of information limits what the moving average can calculate.
There is a lot of information that is not part of the historic movements in forex charts. This information can affect what the price action will be in the future. As the moving average is not able to determine what this information is it cannot include it in the calculations it completes. This means that you can sometimes get incorrect information from the indicator.
Recent Data and Old Data
There are a lot of traders who feel that the movement of the market in recent days is more important that movement from the past. When you use moving averages the data is combined and there is no emphasis on any of it. This means that the moving average see the movements from 2 weeks ago as just as important as the movement from 2 hours ago.
This makes a lot of traders wary of using moving averages because they feel that newer movement shows what the market is doing. If you do not place the emphasis on this movement then you are not actually looking at what the market is doing right now. When you use technical analysis you should be looking at what the market is doing right now.
Long-Term Averages Distort Short-Term Movement
When you use a long-term moving average it creates a summary of the market movement. This means that the short-term trend movements are glossed over to provide you with the long-term directional movement. This can often be misleading as you could assume that the market is ranging.
This distortion can also lead to lost trading opportunities. If you are looking at implementing two trading strategies to take advantage of the market you have to be careful with moving averages. When you use the different chart timeframes you have to change the moving average. If you look at short-term forex charts with a long-term moving average you will be given incorrect signals. This constant changing of the parameters of the indicator can cause a lot of problems as you forget about it or take a long time to accomplish this.
Should You Use Moving Averages?
As there are a number of problems that you can face with moving averages you may wonder if this is the right indicator to use. The fact is that moving averages can be very helpful if you use them correctly. Of course, you should consider using a verification tool as well when you are trading.
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