This is a guest post by Ahmad Hassam
Moving averages are one of the most simplest yet the most widely used technical indicators. You will find almost every other trading system using moving averages in one form or another. Moving averages are just the average of the closing prices of a currency pair over a certain period of time.
Moving averages can be useful when you are looking to confirm a trend. The first rule of thumb when using moving averages is that when the currency pair price is above the moving average, an uptrend is in place. When you combine this with a bullish candlestick pattern you can get profitable entry and exit signals. Similarly, when price action is below the moving average, a downtrend is in place.
If you find a bullish candlestick trend continuation pattern forming above the moving average, it means the trend will continue for sometime in the future and you can safely enter into a long trade.
However, a better method would be to trade with two moving averages instead of one. When you combine two moving averages with candlestick patterns, you get a powerful combination. In this case, the trend will be defined by the location of slow moving average (the one having more periods) relative to the fast moving average (the one having less periods).
So when the moving average with more number of periods is trading higher with the one with lower number of periods, the trend is positive. Suppose, you have a moving average cross meaning the slower moving average crosses above the faster moving average.
It means an uptrend. When this is confirmed by the appearance of a bullish candlestick trend continuation pattern like the bullish thrusting line pattern, you can safely enter into a long trade. You can continue riding the trend till the slow moving average crosses below the faster moving average.
Placing a stop loss when trading with moving averages is a bit tricky as unlike the trend lines, there is no straight line that you can use to place the stop loss. Another problem that many traders face is recognizing the candlestick patterns that signal trend continuation or a trend reversal.
You can use a Candlestick Patterns Recognizer Indicator that can recognize the candlestick pattern automatically and tell you that a thrusting line pattern is appearing on your chart or a neck line pattern is appearing. This way, you don’t have to get confused figuring out the candlestick pattern.
Using the combination of two moving averages one slower and other faster like 10 days and 20 days moving averages with candlestick patterns can be a powerful. Both confirm each other. Just like you can use bullish candlestick patterns in an uptrend to enter and exit a trade, in the same manner you can use bearish candlestick patterns in a downtrend to get entry and exit signals.
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