steve.jarvis's picture

A reminder of the importance of long-term moving averages in the FX markets

Regular readers of my column may recall the article I wrote last October ( see http://bit.ly/1QnSdFg ) on the subject of which moving averages I find work best in the FX markets.  Within that article, I questioned why so many "market commentators" still refer to the 200 day moving average, when the evidence points to the 260 day (one year) moving average being a better tool.

Recent FX market action has reminded me of this fact, and hopefully the couple of examples I cite below might just sway a few more people to ditch the 200 day moving average and move instead to (what I consider) the more reliable 260 day line! 

Example 1 (below).  EUR/USD.  Lets take the recent advance in EUR/USD from the July / August higher double bottom at 1.0814 / 1.0850.  The short-term technical position turned positive when resistance at 1.1125 was cleared (accompanied by MACD crossing back into positive territory) on 12th August and a little over a week later the May / June tops at 1.1464 / 1.1431 were also taken out as the recovery seemed to be gathering pace.   There was also positive news for 200 day moving average watchers, as EUR/USD took out that trend-line at 1.1337 on 21st August (see pink line on chart).  However, the move was reversed the following trading day at 1.1701, leaving a failed upwards break of the 260 day line at 1.1661 (see blue line), with just the wick and no part of the body of the daily candlestick probing above it.  I recall alerting Tradermade's service users of a potentially bearish failed upwards break at that time.  The rest, as they say, is history. 

 

 

 

 

 

 

 

 

 

 

 

 

Example 2 (below).  USD/JPY.  Similar to the above, but in reverse.  On Monday 24th August there was a break beneath the (pink) 200 day moving average (at 120.71) immediately prior to the 8th July key setback low at 120.44 being lost, completing a 3 month double top. However, the ensuing intra-day slide only briefly took out the (blue) 260 day moving average (at 117.97), with just the wick (and no part of the body) of the candlestick probing below the line.  In the first instance this indicated a potential (bullish) failed downwards break and since that time an initial rally to 121.72 has been followed by a potential higher low at just over the 260 day moving average, a further potentially positive sign.  Meanwhile price action is actually whipsawing around the 200 day moving average. Although a return to strength is so far unconfirmed, the point is had the 200 day (and not the 260 day) moving average been relied upon during the recent retreat, there would be no prospect of retaining long positions at this time. 

 

 

 

 

 

 

 

 

 

 

 

 

Of course, any technical analyst worth their salt is not going to be relying on just one indicator such as the 200 or 260 day moving average, but will have a rules based system of which moving averages might form one part.  In USD/JPY for instance, a bearishly divergent MACD indicator would have prompted profit taking on long positions ahead of the 24th August breakdown.

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