Moving Averages and Which to Use?

Filed under: Learn Forex Trading |

Moving averages are without doubt one of the most popular tools of technical analysis in the world of forex trading. However, there are so many to choose from that the beginner trading probably doesn’t know where to start! If you are just starting out trading forex, or, if you have been trading for a while and are constantly changing your moving averages’ settings, then read on and I will go through a few of the basics with you.

 

To begin with, you have probably seen that there are “simple moving averages” (SMAs), and “exponential moving averages” (EMAs). What is the difference? Well, basically, an SMA is just what it says on the tin – “simple”. It is the average price over a pre-defined number of days. An EMA, also sometimes known as a “weighted average”, is weighted so that the most recent days hold more weight. Thus, older data holds less weight. I personally prefer the EMA to the SMA because the most recent data is always the most relevant.

 

Now, the next big question, how many days shall you set your SMA or EMA to? There are various popular ones that you might go for, such as an 8, 21, 50, 100, 150, or 365. Just remember that the longer your SMA or EMA, the more slowly it reacts to any price changes. On a daily chart, I prefer an 8-day EMA and a 21-day EMA, and when one crosses over the other, this tells me what the short-term trend is. However, this is because most of my trades are trades taken on the 1-hour, 4-hour, and daily charts and they last typically for only a few hours or at most, a few days. If you tend to make longer term trades than this, then you should probably be using larger SMAs or EMAs. My advice is to try a few and see which works for you best. It is not an exact science, but moving averages are very useful tools to have in your trading arsenal.

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