By Sean Hyman

Plenty of first-time Forex traders are turned off by currency charts.

But the truth is, charting techniques don’t have to be impossible. You don’t have to use retracement levels, Fibonacci, or Elliot Wave Theory if you don’t want to.

In fact, one of my favorite charting techniques is also one of the simplest…and it can help you spot long-term trends coming in the Forex market….

It’s called the 200-Simple Moving Average.

The 200 SMA is one of the most widely used indicators in the world. I even catch purely fundamental traders using the SMA in their charts. Why? Because everyone needs to know where long-term trends are heading, even pure fundamentalists.

Let’s talk about how you use it. First, you should pull up a daily chart that goes back in time at least a year (or even longer is better).

Then place a 200-Simple Moving Average (SMA) on the chart. On the chart below, the grey line is the Simple-Moving Average (the one with the arrows). The SMA can be found under the “Studies” or Indicators” section of most any charting package.

Your Key to Spotting Long-Term Trends…

Above, I’ve charted the EUR/USD pair on the daily chart that goes all the way back to mid-2006. That’s a HUGE chunk of time when we’re talking about currencies.

Towards the left side of the chart, you can see that the “average” price moves upward over time. So while the price may be jagged and spiky at times, the moving average smoothes this all out so that we can tell if the currency pair is headed up or down overall.

To the left of the chart, you can see that the price continues to climb higher. This tells you that the EUR/USD was in an uptrend at that point. In other words, the euro moved higher vs. the dollar overall.

However, on the latter part of the chart (right side), the trend turns downward and you can see the euro fell vs. the dollar overall.

You want to define the trend’s direction and trade with it because that’s where the higher probability trades lie. Low probability trades would be shorting an uptrend or buying a pair in a downtrend.

You will notice that the price tends to trade at or above the 200 SMA in an uptrend and in a downtrend the price dips below the 200 SMA and holds at or below it.

Bottom line: You always want to trade with the overall trend. Use the Simple Moving average to figure out if your pairs are heading up and down, and then always trade with trend.

Happy Trading!
Sean Hyman, Professor FX

P.S. This is the kind of technical analysis my colleague, Ashish Advani constantly does for his exotic currency traders. It’s the very reason he just grabbed a 260% profit on the Polish zloty – just this week. Could his strategy work for you? Click here to find out.