2Bull Forex Blog

Moving averages are useful in forex trading but you need to know how to use them correctly.

If you do they are useful for buying into existing trends, but they should never be used in isolation.

Let’s see how to use them correctly.

There purpose

Moving averages come in various forms, but they all have the same aim:

To help traders identify trends smoothing out the day-to-day price fluctuations and show the average price over a set period time.

The closing price is simply added up and divided by the period of the moving average.

Popular moving averages

200 Day moving averages are popular for tracking longer trends

20 to 60 Day moving averages are useful for intermediate trends

5 to 20 Days are popular for short cycles.

Which average should you use and when?

They should never be used to identify new trends and never use moving averages in short time periods i.e under two weeks.

A Lagging not a leading indicator

There a lagging indictor in terms of price action NOT a leading indicator.

You should NOT use them to identify new trends does not mean they are not useful.

They are good as a filter for entering existing trends that are moving strongly.

A simple way to use moving averages

For example, a set up we like in a lot of markets is when a trend kicks off the 40 day moving average we view as a line that if broken the trend could be in danger.

We then look for pops back to the 18 day moving average to consider entering trades in the direction of the existing trend.

Moving averages should never be used by themselves.

They should be combined with other indicators i.e. support and resistance or a momentum indicator such as the stochastic.

They can be a very useful tool for entering an existing trend in motion and a warning sign when a trend is ending.

They still have a use

Moving averages are not as popular as they once were - I can remember the 1970s and you could simply trade using moving averages.

Trends in currencies and commodities then, were not subject to the volatility they are today, so they can’t be used in this way.

However, as a backup tool for identifying and entering strong trends they can still make a valuable contribution to your trading plan.

A stock is also known as a share. They refer to ones own investment in a company. Stocks are tagged by the prices on them. The better the company the higher the price of the stock. Owning a stock does not mean you own a whole company, but rather that you own a small piece of it. It’s the amount one is investing in the company to share their profits or losses. Of course stock investors are provided with some privileges of sharing profits and voting for management.

Stock influences the economy and also the currency value of a country. The better the stock prices are the better the stock market is. The better the stock market is the better the economy of a country is. Usually stock values are most fluctuating. No one can exactly say when a stock incurs profit. Many invest in stocks, some become multi millionaires overnight, and some will be bankrupted overnight. That’s the power of a stock. Now the question that comes into every ones mind is how this powerful and most fluctuating stock looks like. It’s just a piece of paper that has proof of ones owner ship on it. Now days it is being stored as an electronic image rather than as a paper.

Stocks are of different types, there is Common stock and preferred stock. Common stocks are considered as the most risky type of stocks. If the company is in profits they common stock holders entail greater benefits but if the company is in losses then common stock holders will loose the most. On the other hand preferred stocks are less risky. Preferred stock holders have some degree of ownership on the company and under any circumstances they are assured of certain amount of payback. If the company is in losses after the debt holders it is the preferred stock holders that will be paid.

But how these stocks are traded? It’s quiet confusing. They are usually traded in a stock market where buyers and sellers sit together and decide what should be the price of a stock. Sometimes this kind of trading is also done online. They are the ones who are responsible for change in the value of stock. If there are many who want to buy a stock than those who wants to sell it then the price of the stock goes up.

On the other hand if there are few people to buy a stock and more to sell a stock then obviously the price of the stock go down. What makes people to buy a stock? It is just the hope to incur profits on them. If the company is in profits then others want to buy that stock because they can incur profits on it. So they stock value increases. But if company is in losses then no one wants to keep those stocks and they try to sell them but very less people attempts to buy them hence price of a stock goes down.

1. Cut your losses. Let your profit run.

Always remember to set stop loss point.

2. Learn from your losses.

Make each loss as a lesson to enrich your investment experience.

3. Don’t be greedy.

People always turn their large profits into losses because of greedy.

4. Never leverage in a losing position.

Most of people try to leverage in losing position. It’s a BAD idea.

5. Observing.

Standing aside is a good idea when you cannot judge which the coming direction is.

6. New mindset to beat the market.

Nowadays, fast money is the new market trend, long term trading already out dated.

7. Discipline and patience is the key to win.

Don’t chase high if you are not sure when will the market reverse.

8. Apply only few strategies to suit different stocks.

Using too many strategies will make you confuse.

9. Narrow down your focus.

Do not try to focus on too many stocks at once. Limit to 6-7 counters.

10. Find a good mentor.

A good mentor is the golden key to your investment success.

Stock is the term we often here about. If any one has a question, what is all this about, then the answer is stock is nothing but share in a company. Usually many companies let people invest on them and they share their profit or loss with all of those investors. Whatever money investors invest on the company is spoken in terms of stocks or shares.

Each stock or share has some price on it. The share owner buys it for that price. The money share holder pays is used by the company for its progress. Some times it is through the stocks companies grow to the level of multinational. Indirectly stocks also affect a country’s economy. The more the shares a buyer buys the more the command he gets on the company. But of course whether he makes a difference in the management decisions depend on the amount of share he has in the company. If he has the highest share then he could be the key maker. The least right a share holder has on the company is to elect the management board.

Depending on the performance of the company value the stock changes. If the company is in profits then stock value increases, and if the company is in losses the stock value falls down. Some times stock value increases with the increase in good will of the company among people and stock value decreases with the malicious rumors about the company. Usually all the share holders look forward for increase in the value of stock, if it does not happen and if the fault is with the management, then they all the share holders together can use their voting power to change the management. Since a stock holder has his investment in a company it does not mean that he is responsible for the frauds if any done by the company. Maximum amount he loses is his investment. Maximum amount he gains has no limits set.

Investing in stocks is not an easy task. It’s hard to decide where to invest in. Some smaller companies whose share prices are low are not 100 % reliable. They may be closed down anytime without prior notification. Big companies that are established through years are trustable but their share prices are high. So, it depends on the stock buyer where to invest. A proper decision has to be made keeping following factors in mind. First stability of the company has to be considered next its history then the profits that could be incurred by investing in that company has to be looked over. After all these a decision has to be made. In spite of making a so called good decision, there is every chance of losing the investment. So share holders first should prepare themselves for the worst.

Usually many bureaus will be available to advice where to invest, but not all are trustable. Advices can be obtained online for lower fees, but they are not reliable. Advices from investment clubs are considered as one of the best options. Advices can also be obtained from financial professionals but they are expensive. It depends on the share holder to decide what is right and what is wrong. Good investigation of the stock market is required before investing on stocks.