How to use the moving average with the candlesticks? We have already seen three ways to use the moving
average.
But we are not going to use the crossover with the candlesticks.
I think that the crossover is a good way to analyze the trend in the long period, especially if you use
it on daily and weekly charts.
But in my experience the crossover method doesn't add much value to Candlestick analysis, because the
crossover appears when the trend or the retracement is already started and with the candlestick patterns
we usually try to understand from the very beginning when a new trend or a retracement is happening.
So in this chart we have pound-dollar, 4-hour is the timeframe and I have added a simple moving average
with a period of 100 candles.
First of all, we can divide the charts in two parts with this vertical dashed black line. In the first
part, we have a clear uptrend with the candles that are over the simple moving average. Then there's
a break of this moving average and the price starts to go down.
So we can see that in the second part of the chart we have all the candles below the moving average.
So we are in a downtrend.
This can be a good tool to analyze the trend on the market and select your trades according to the market
direction.
Of course you don't want to open short positions
if the price is in an uptrend and you don't want to open long positions if the market is in a downtrend.
Then we can use the moving average as support and resistance.
You can see that the price touches the moving average here and here before continuing its uptrend.
When the price is close to the moving average, you can start to look for candlestick patterns that confirm
the trend.
So in this case we have a bullish engulfing pattern on the moving average.
It is a very strong bullish signal.
Here there isn't a clear signal to buy the couple. We have a hammer here, but it is quite small compared to
the previous candles,
so I wouldn't have taken that one.
I'm particularly risk averse so I try to avoid situations that are not so clear to me but maybe another
trader could have opened a long position after the hammer and see what happened in next sessions.
In this example I have used a 100 simple moving average because it has a smoothing effect and it is easier
to analyze.
So if you're getting familiar only now with candlestick patterns and moving average, I suggest to use
100 or 200 as a period.
I show you what happens if you choose 24 as a period and you will understand why it is harder.
So insert and indicators. Trend and moving average and 24 as a period and I want to get at
least an exponential moving average because I have a short period. It is in a way more accurate but price
will break more easily the moving average and you will get a lot of situations where you need to analyze
deeply the market structure to understand if it is a real break or just a temporary retracement from
the main trend.
Now I don't want to be vague just saying that you can be always right if you study deeply the market
structure.
There are traders that say that they know exactly when it is a false breakout and that they are almost
100 percent of times right about their decisions based on the moving average.
I honestly don't believe that. The reality is that sometimes it will happen to lose your position because
the market doesn't always follow your analysis. It is something that you need to accept whether or not
you trade with the moving average. You can see that in this first part,
you would have a lot of tough decisions to make and it is normal to get caught in some bad decisions
that will cost you money.
But in this second part, the moving average acts perfectly as a resistance and I'm sure that traders
that use the moving average made a lot of money from this scenario.
The best thing about Forex trading is that you can always go back in the past with the chart and analyze
what settings work better for you and help you to take the best decisions on the markets.
So you analyze past charts and see that the moving average with 24 candles doesn't work for you,
you can have a look at one hundred period then or you can switch to another type of moving average.