Everyone wants to find a tool that is going to help them improve their odds on a trade. Whether you are looking to enter or to exit a position, one of the most popular tools used by traders is the moving average. I’m a big fan of them as well. They simply tell us the average price of a security over a given period of time. For example, a 20 period moving average on a daily time frame tells us the average closing price of the past 20 days. They are indeed simple, but they are also very powerful
The currencies are well-known for holding technical levels of support and resistance such as moving averages. The EUR/CAD is a pair that I am particularly fond of. Over the course of the past week, the EUR/CAD has struck strong daily and weekly resistance coinciding with major moving averages. It has hit the 20 week moving average, as well as the 200 day moving average. While one level is strong, two are even stronger.
Even though the momentum of the rally into this resistance level was stronger than average, giving us a buy setup for a reversal earlier in June that I followed on my site Tonihansen.com, the current resistance in the form of these dual moving averages suggests that we should now expect a pullback to allow it to correct over the next several weeks, and even the possibility for that correction to continue over the next several months. (See my recent article on stocks that run ahead of the market).
The EUR/CAD is a well-trending currency. As it trends, it holds the 20 day and 100 day moving averages very well, depending upon the strength of the trend. It is reasonable to expect that we will now see a correction back into those levels as the market continues to catch its breath. As the 10, 20, 50, and 100 day moving averages begin to converge, the formation of a trading range wedged between these moving averages that holds the upper half of the daily rally off June lows would favor a break higher into the 200 day SMA. A stronger reaction off this resistance, however, that breaks in the lower half of that rally will mean that the shorter term moving averages will become less influential. We saw this back in 2009. It then becomes necessary to move to the larger time frames, such as the weekly and monthly charts, and then follow the moving averages on those time frames for stronger moving average support and resistance levels.
While moving averages are not a Holy Grail, they are like the treasure maps found in a mystery novel. They are a part of a larger puzzle, filling in a gap in the bigger picture that can help make sure that you are at least heading in the right direction!
You can contact Toni at www.tonihansen.com.