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The Stronger The Trend, The Smaller The Moving Average

You'd assume the axiom “the stronger the trend, the smaller the moving average” is a wrong assumption, because, as we know, the stronger the trend, the bigger the moving average.

But this axiom is actually correct, because the stronger the trend is, the faster the price moves in one direction. The bigger moving averages, such as the 100 and 200 SMAs tend to move slowly, particularly when a trend starts. While the smaller moving averages catch up with the price faster during such trends.

This is the case with the 20 SMA on the EUR/USD chart. Last Friday, this forex pair started the next leg of the recent uptrend and it has been relentless.

Who wants to go long right now? 

As you can see on the forex chart above, the bigger moving averages stand at the bottom, while the 20 SMA (grey) has already caught up with the price. The 50 SMA (yellow) is standing about 70 pips lower.

This moving average has been a support on Monday and on Tuesday, so the chances are that it will do so again. Although, this forex pair has moved up too far too fast, so a pullback is overdue. However, we can still grab a few pips based on this moving average.   

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Skerdian Meta
Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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