This is the first post in a series about different tips & tricks that you can add to your trading arsenal.

Today I’ll be talking about Daily moving averages. Moving averages are indicators that display the average price movement. Basically, if the moving average is pointing up, you have an uptrend and if it’s pointing down, you have a downtrend.

There are two main types of moving averages that traders use and those are simple moving averages (SMA) and exponential moving averages (EMA). Most traders apply the averages to the close price. Basically, a 50 day SMA applied on the closing prices works like this: it adds all the closing prices for the last 50 days and divides them by 50, obtaining an average closing price for that 50 day period. For each 50 day period, it plots a line on your chart between the previous 50 day average closing price and the current one. The EMA works the same way, just that it adds more weight to the more recent days, so it’s less lagging than an SMA. Take a look at the chart below, as we’ll be using this one for our explanations. The blue line on the chart is the 50 day EMA:

50, 100, 260 D1 EMA's

As you can see, the 50 day blue EMA provided excellent points of support lately, in this bullish EURUSD rally. I always watch this EMA and when price reaches it, I look on a lower timeframe to find a good entry in the direction of the trend.

The other EMA’s I suggest you should be adding to your charts are the 100 and 260 day EMA’s. The dark khaki line is the 100 day EMA and the orange line is the 260 day EMA. These also provide good support/resistance levels once the 50 day EMA is broken, especially the 260 day EMA, which is very important, since 260 is roughly the number of trading days in a year, so that means it’s a 1 year EMA.

Besides using these as support/resistance, you can also use them to gauge the medium and long term market trends. Basically, when the price is above one of these EMA’s and that EMA is pointing upwards, you are in an uptrend. When price is below and the EMA angle is pointing down, you’re in a downtrend. When the EMA is (or almost is) horizontal, you’re in a sideway trend (ranging market). I consider the 50 day EMA shows me the medium term and the other two I use for the long term view. Right now, EURUSD is in an uptrend.

After I discussed the importance of psychology in the previous article, let’s say a few words about self-fulfilling prophecies in Forex.

Many newcomers fall into the mistake of using lots of indicators and forgeting about the fundamentals (economic news). As I said, the key to success is doing what the big guys are doing and watching what everyone else is watching. So, do all banks and hedge funds watch moving averages, MACD, Stochastics, RSI or other indicators? If yes, then do all institutions use the same settings for these indicators? Do all institutions draw identical Fibonacci retracements? The answer is no, they don’t.

So what do all the big guys do?

1. Well, they certainly watch out for big economic news and reports. So, if you want to be a better trader, make sure you do that too. You will find links to a good economic calendar and a news site in My favourite sites section on the right side of this page. Make sure you read them every morning, before you start trading. Read the news to find out what the long-term market sentiment is and read the economic calendar so you know when to stay out of the market and what to expect. I would advise you to stop trading during major economic releases (events marked in red in the economic calendar). Those are times when big spikes can occur and it’s too dangerous for a newbie to trade.

2. What else do professionals watch out for? On the short-term, technical analysis is a must. And I, for one, am a short-term trader. I’m a day trader, which means I close my trades in the same day I open them. I do not leave my positions open over night or over the weekends.

Technical analysis is a must-use for short-term traders. As I said at the beginning of this article, banks do not look at indicators. The most important rule in any business is to KISS (keep it simple, stupid). That’s what the smart guys do. They keep things simple and only use basic tricks. And the most widely used technical analysis trick is: support and resistance lines. We will talk about them in depth in another article, but now I just want to tell you why they work.

You see, when Forex was just born, it was run by mass psychology (much like today). So people watched the price movements and, for instance, they saw that price stopped two times before at 1.4000 and then went back up. So they thought it’s likely that the next time it gets there, it will go back up again, because 1.4000 acted as a support level, blocking the price to move further down. Many traders saw this and used this logic, so this became widely used. So they just work because everyone uses them. They are self-fulfilling prophecies. They work because we all think they will.

In my strategy, I only use horizontal support and resistance lines and Fibonacci ratios. I rarely use diagonal support and resistance lines (also called trend lines). However, I will talk about all these three major parts of technical analysis in the next articles and I will show you how to draw them and how to trade them.