One sweet way to use moving averages is to help you determine the trend.

The simplest way is to just plot a single moving average on the chart.

Uptrends

When price action tends to stay above the moving average, it signals that the price is in a general UPTREND.

Downtrends

If price action tends to stay below the moving average, then it indicates that it is in a DOWNTREND.

Use a moving average to spot the trend

The problem with this is that it’s too simplistic.

Let’s say that USD/JPY has been in a downtrend, but a news report comes out causing it to surge higher.

Moving average shows a downtrend

You see that the price is now ABOVE the moving average. You think to yourself:

“Hmmm… It looks like this pair is about to shift direction. Time to buy this sucker!”

So you do just that. You buy a billion units cause you’re confident that USD/JPY is going to go up.

Faked Out

Fakeout! Downtrend continues!

Bam! You get faked out!

As it turns out, traders just reacted to the news, but the trend continued and the price kept heading lower!

What some traders do, and what we suggest you do as well, is that they plot a couple of moving averages on their charts instead of just ONE.

This gives them a clearer signal of whether the pair is trending up or down, depending on the order of the moving averages.