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Talking Points

- Forex traders look to the 200-day simple moving average to determine trend direction.

- The Euro continues to trade above the 200-day simple moving average indicating that the trend is up.

- The addition of a 10-day SMA provides a visual trigger to buy on dips.

Though moving averages are considered lagging indicators constructed on taking the last “x” number of closing prices and then finding the average of them and plotting this value on a line, they can be useful for finding trade entries when a longer moving average is paired with a shorter moving average. This article will show you how to identify and trade this setup that is forming on the EURUSD.

They are called “moving” because the oldest data points are dropped and the new value to the right is added in its place. For example, to calculate a 200-day moving average you would add up the closing prices from the past 200 days and then divide the result by 200.Taking out weekends, there are approximately 200 trading days in a year. So when price is below or above the 200-day moving average it is the same as stating that a Forex currency pair is above its yearly average.

However, once a forex currency pair moves significantly above the 200-day moving average, its ability to help a trader time entries into a trend diminishes. The addition of a 10-day exponential moving average can give traders a buy signal as price dips below the 10-day EMA and then breaks back above the EMA.

Learn Forex: EURUSD Moving Average Setup

How_to_Use_Moving_Averages_to_Time_Your_Next_Euro_Trade_body_Picture_1.png, How to Use Moving Averages to Time Your Next Euro Trade(Created using FXCM’s Marketscope 2.0 charts)

Trading Setup

In the example above, the Euro is above the 200-day moving average represented by the rising black line. Once EURUSD rallied from a bounce from the 200-day moving average back in September, the pair has not looked back. The 200 SMA only serves as a form of a “compass” telling Forex traders what is the dominant trend direction. Adding a 10-day EMA gives a “line in the sand” on a currency pair letting the trader know when a profit-taking decline has subsided and buying pressure is returning. Notice when the Euro has declined below the 10-day EMA while remaining above the 200-EMA and then turns above the 10-day EMA, the trend continues higher. This allows forex traders to “to buy the dips” in an uptrend.

The Trading Plan

Currently, the Euro sits just below its 10-day EMA and above its 200-day SMA. A daily close above the 10-day moving average in the 1.3700 area would be a trigger for a move north of the 1.3800 area. If the Euro can close on a daily basis above 1.3700, a protective stop can be placed just below the 1.3600. If price does not close above the 10-day SMA then the setup is no longer valid.

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