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Moving Average Crossover One of the most popular approaches for market timing - with good reason - is the moving average crossover.

I've found that the exponential moving averages EMA's tend to work better than simple averages for this application, and my favoured combination is the 6 and month exponential. At present the blue 6-month EMA of closing price is well above the red month EMA , indicating an uptrend. The crossings seen in the above chart are in early bearish and mid to late bullish.

In truth the swoon was a little harrowing but just by focusing on these moving averages - and ignoring the noise - you would have sailed through relatively unscathed.

MACD Taking the moving average concept one step further, we know that the MACD oscillator is the difference between two EMA's, so we should be able to replicate the crossover system with this indicator. Indeed a bearish crossover would correspond to the MACD light blue line going negative, and as seen above its zero crossings coincide with the moving average crossovers on the main chart.

Now the advantage of the MACD is that a signal line is provided, which is just a moving average of MACD. As the bullish moving average crossover can be a bit slow to happen after a bear market bottom, we can instead look for a signal line crossover. The signal crossover in mid provides an excellent example; it occurs a full 4 months before the EMA crossover.

In this application I ignore the signal line when the MACD is above zero; I don't take bearish signal crossovers as sell signals and only consider the bullish crossovers.

I use the 6 and 12 month EMA's with a 14 month signal line; you could use a shorter period signal line for faster response but this generates some false signals. RSI I use RSI 14 with a cross downward through 50 as the sell signal and a cross upward through 30 for the buy.

The background colour on the indicator above covers only the 30 to 50 region.

Written by. Edited by. Written on. Jul, Updated on. Sep, Table of content. When it comes to the long-term currency trading strategies, they differ from other short term methods like scalping or day trading in the sense that they focus on identifying and then capitalizing on the Forex trends. It goes without saying that there is no one long term trend trading Forex approach which can always guarantee success. However, the historical analysis shows that there are several ways to identify those trends with a relatively high degree of accuracy, which can certainly help traders to place winning traders and earn some decent payouts in the process.

Firstly, we have nominal interest rates. The monetary policy differences can have a notable impact on the Foreign Exchange market. This provides opportunities for long term trend following in Forex trading. When two central banks follow very similar policies, this might make very little difference for the exchange rate movements. However, when one central bank raises rates steadily and the other cuts rates or maintains a very dovish stance, this divergence can certainly lead to the surge of one currency in a given currency pair.

Also, it is worth noting that the relative real interest rates can have a significant influence on the long term direction of the exchange rates. This means that if the differential between the key interest rate and inflation of a given currency is larger than its peers, it is likely to appreciate over time. The reasoning behind this is the fact that the currency is more attractive to traders and investors when its deposits and other fixed-income instruments can retain their buying power.

Finally, the Purchasing Power Parity PPP can exert a significant influence on the Forex market. This term is defined as the exchange rate at which the average prices of goods and services is equalized between the two countries. Therefore, when the major currency pairs deviate significantly from this indicator, it is likely that eventually, they will return to PPP levels.

This gives traders a chance to identify and potentially capitalize on those trading opportunities. When it comes to trading, it is obvious that there is no single best long term trend indicator Forex.

However, any objective observer in the market can notice that the interest rate differentials have a significant impact on the exchange rates. The reason for this is quite simple. Every investor and trader at the market is looking for some kind of return for their investment. Higher interest rates mean that traders can benefit from carry trading. This involves borrowing in the low-yielding currency in order to buy high-yielding currency and then profit from the interest rate differentials on a regular basis.

The brokerage company usually pays daily interest to their clients, as long as they hold such trades open. The positive impact of the high interest rates is not strictly confined to the trader community. When a given central bank raises rates, this means that investors and savers will get higher returns on savings accounts, Certificates of Deposit CDs , and other fixed-income securities.

As a result, the currency in question becomes much more attractive. This means that when the interest rates in a given country are high, it is appealing not only for domestic investors and savers but for overseas market participants as well. Foreign investors can make use of those opportunities by opening non-resident offshore bank accounts and depositing their funds, earning a considerable amount of money in the process. This tendency even became much stronger in the aftermath of the great recession.

As the majority of central banks of developed countries have adopted near-zero interest rates, the rates of Certificates of Deposits CDs , savings accounts, and other fixed-income investments fell dramatically. As a direct result of those developments, some market participants decided to hunt for yields among the dividend-paying stocks in the market.

At the same time, many savers and investors who preferred fixed-income investments started to look elsewhere in order to earn some decent returns on their capital. As a result of this process, the high yielding currencies become more attractive for market participants, which inevitably leads to a rise in demand. As the basic law of economics suggests, when the demand rises it tends to push the price higher. In the Forex market, this means that the currency in question tends to appreciate against its peers.

As we can see from the image above, the Australian dollar made some short-lived gains during late , benefiting from the temporary weakness of the US dollar.

So the obvious question here is: What drives those types of long-term trends in the Forex market? Well in our example, there was an obvious case of the monetary policy divergence. In the case of the Reserve Bank of Australia, by the interest rates were already at 1.

During the subsequent years, the Australian policymakers have authorized several additional cuts. As a result of this process, at the beginning of , the cash rate was down to 0.

The Reserve Bank of Australia has also consented to two additional cuts in March , in response to the COVID pandemic, bringing the rates to 0. This policy was in sharp contrast to that of the US Federal Reserve. By the beginning of , the Federal Funds rate still stood at 0. However, the US central bank has authorized 3 rate hikes during and 4 additional rate hikes in , bringing rates near 2. Despite those developments, the US Federal Reserve did start cutting rates incrementally from Summer The pace was accelerated by the economic headwinds, brought by the outbreak of COVID pandemic.

As a result, before the end of March , the rates were back close to 0. So as we can see from the above example, the analysis of the monetary policy of relevant central banks can very often help trades to identify short and long-term trends in the Forex market. As we have discussed earlier, higher interest rates can certainly give a currency a certain degree of advantage over its peers.

However, for the sake of accuracy, it is worth mentioning that this is not always the case. After the steady sharp appreciation of the single currency, the pair have already reached 7. This was followed by the correction, which brought down the rates back to 5. However, this was proven to be short-lived, as the uptrend resumed during the subsequent months. As a result of this development, by June , the pair is back at 7. Now, looking at this chart one might expect that the nominal interest rate differentials certainly have favored the single currency.

However, if we take a look at those numbers, we will discover that quite the opposite is the case. This is in sharp contrast to the policies of the Turkish central bank, which kept rates within 8.

So logically speaking, one would expect that such large interest rate differentials would have pushed Turkish lira much higher. So what is the reason behind this surprising development? Well, in order to answer this question, it is worth mentioning that the real interest rates can have an even stronger influence on the exchange rates than the nominal rates.

The latest Consumer Price Index report in Turkey has shown that the annual inflation rate stood at This means that even at the current high nominal interest rate of 8. On the other hand, for the same period, the annual Harmonized Prices for Consumer Prices HICP in the Eurozone was at 0.

This means that the real interest rates in the Eurozone currently stand at This might not be ideal, but it is 2. Therefore, this gave a significant advantage to the Euro over the Turkish lira. This is a classical case of day-trading trends against long-term trends. In the short term, when a central bank raises rates, traders tend to buy the relevant currency, hunting for higher yields.

However, in the long term, we have an entirely different dynamic. One of the main purposes of saving and investing money is to protect the buying power of the savings. Consequently, when bank deposits pay lower returns compared to the inflation rate, it tends to weaken the currency. After all, in general investors and savers are not much interested in losing their purchasing power to inflation. On the other hand, when deposits and other fixed-income investments have higher returns, compared to the annual Consumer Price Index, this makes the currency in question very attractive.

This lets savers and investors preserve the buying power of their capital and even earn some income in the process. So if investors converted their savings to Turkish lira fixed-income assets, they might receive close to 8. This sounds very lucrative, however, at current inflation rates, during one year period, the Turkish lira might lose As a result, after one year, since making those investments, investors would gain 8. Obviously, in this case, the investment would not be earning any interest, but it would at least retain nearly all of its buying power, with annual inflation at 0.

So in this case the real interest rate will be at Therefore, this is one of the main reasons why the Euro has risen steadily against the Turkish lira during the last 3 years. Identifying undervalued and overvalued currencies with PPP have been one of the key long-term Forex trading strategies among the experienced traders.

The indicator essentially shows the exchange rate at which the average prices for the goods and services will be equalized between the two given countries. Here it is worth noting that there is no single universally accepted method of measuring PPP. Instead, it is measured by several organizations. One popular measure is PPP published by the Organization for Economic Cooperation and Development OECD.

The OECD makes those calculations by comparing the relative prices of thousands of goods and services between different countries. The reason for this choice is the fact that the Big Mac itself represents some sort of diversified basket of goods and services. It includes the price of bread, sesame seeds, cheese, beef, lettuce, cucumber, union, transportation, electricity, rent, wages, and taxes. The rationale behind the Purchasing Power Parity theory is the fact that when the average prices on products in one country is considerably lower than in other nations, it usually raises the demand for its exports.

Individuals and businesses are always looking for good deals when purchasing goods and services. However, in order to purchase those products, the foreigners first have to convert their currency into the local currency. As a result of this process, the demand for the currency in question rises and leads to its long term appreciation.

Every time you open a position, predict where the currency will go and how large the price movement will be. Go to mobile version. Bullish Trends. This is an SMA based indicator. Alan Brugler Andrew Hecht Angie Setzer Darin Newsom Don Dawson Gavin McMaster Jim Van Meerten Josh Enomoto Mark Hake Oleksandr Pylypenko Rich Asplund Rick Orford All Authors. Using the information you have at your disposal, you should analyse where the USD will go.

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