Moving Averages

Filed under: Learn Forex Trading |

One of the most popular and common indicators in western technicals is the moving average. You will find them overlaid on the vast majority of charts in some form or another. There are variations of moving averages, and they can be simple, cumulative, weighted, or exponential. In forex trading, the most common are simple and exponential moving averages – so we’ll concentrate on those.

 

Let’s start with the simple moving average, or SMA. You can choose the number of your moving average yourself. If you choose, for example, a 10 period simple moving average, your indicator will take the last ten candles on your charts, add up all the closing prices, and divide them by ten. What this does is smooth price out so you can see what is happen more clearly. It shows you whether the market is trending up or down in a very visual way. If you choose a lower number for your moving average, it will be more choppy, and if you choose a high number for your SMA, it will be smoother.

 

An exponential moving average (EMA) is a little different because it gives more weight to the most recent periods, and smoothes out any spikes in price. The EMA therefore responds more quickly to price action. However, the downside to this is that you could be faked out with a false move. So some people prefer to stick to the simple moving average as this responds more slowly to price action – which is useful if you are just looking to get an idea of the overall long term trend.

 

Once you have chosen whether you want a slow moving average or a fast moving average, you might want to do what many traders do and put two different period moving averages on your chart (both either SMA or EMA). Then, when your moving averages cross over, this can alert you to the fact that the trend is changing.

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