Moving averages (MAs) are one of the most simple yet the most popular technical indicators out there. Calculating a moving average is very simple and is simply the average of the closing prices of a currency pair or for that matter any security over a period of time. The timeframe for a MA is determined by the number of closing prices you want to include. Comparing the closing price with the MA can help you determine the trend, one of the most important things in trading.
Trading with two MAs can be really profitable. How about trading with three MAs? Believe it or not, some of the highly successful trading systems use three moving averages as it allows the market to be defined into three states; trend, uptrend or downtrend. Let's see how it works!
Now when we use three MAs, the moving average with the least number of periods is characterized as fast while the other two are characterized as medium and slow. So, these three MAs can be 5, 10 and 15. The 5 being fast, 10 medium and 15 the slow.
So when the fast MA is higher than the medium one and the medium one is higher than the slower one, the market is in an uptrend. Similarly, when the fast moving average is lower than the medium one and the medium one is lower than the slower one, the market is in a downtrend.
Now, when the three MAs are not lined up as fast to slow or slow to fast, you can safely say that the market is not in any trend.