Moving average is one of the most widely used TA indicators. Moving average is calculated by finding the average price of the trading instrument over a set number of periods. It is called a ‘moving” average because as the newest period is added, the oldest period is dropped. MA crossovers are used in many trading systems as buy or sell signals. Usually combinations of two or three MA intervals are used. Another popular way of observing buy and sell signals is by using single, longer term MA such as 20 day MA. Buy signals occur when the current price crosses MA from below to above. The sell signal occurs when current price crosses MA from above to below.

Figure 7.4. is a daily candlestick chart for EUR/USD covering a five-month period. Blue line represents 20 day Moving Average. As we can observe from the chart when the price crosses blue line from the above to below it is usually a negative signal and the trend becomes bearish for a certain period of time. Then, when the price crosses the blue line from below to above, sentiment changes and the trend becomes bullish for a certain period of time.

Figure 7.5. is 1-hour candlestick chart for EUR/USD covering a five-day period. Red line represents 4 hour moving average and blue line represents 12 hour moving average. Buy signal occurs when 12 period MA (blue line) crosses 4 period MA (red line) from above to below and sell signal occurs when 12 period MA crosses 4 period MA from below to above.