Moving Averages

When it comes to Forex technical analysis, the moving average indicator, or short “MA”, is one of the most useful tools at our disposal. It calculates the average values of past prices over a number of time periods.

The two main types of moving averages used for trading are the simple moving average (SMA) and exponential moving average (EMA). While both SMA and EMA calculate the average of past prices, the EMA gives more weight to recent prices, implicitly making older prices less relevant.

The moving average indicator can be used on any chart, whether it is a 1-minute or a monthly chart. When displayed on a chart, the moving average indicator enables us to see price movements without the usual choppiness. The more time periods we chose, the smoother the line of the moving average indicator.

Many other technical analysis indicators use moving averages as their basis. The Moving Average Convergence Divergence (MACD) could not exist without using moving averages. The middle band in the Bollinger Bands® indicator (default setting) is also nothing more than just a 20 period simple moving average.

Besides introducing visual smoothness to our Forex charts, long-term moving averages (e.g. 100 SMA) often reveal the underlying trend, while short-term averages (e.g. 15 SMA) tend to act as dynamic support in case of pullbacks. Traders often use combinations of multiple moving average indicators with different period settings on the same chart and wait for crossovers between faster and slower moving averages to signal trend reversals and give them a general idea when to enter or exit a trade. Please visit the strategies section for trading ideas involving moving average crossovers.

MA

Looking at the above image, take note how choppy the candlesticks are when compared with the 15, 50 and 100 SMA indicator lines. The black 15 SMA is a bit wild itself, the green 50 SMA only has a few very small fluctuations, while the 100 SMA is very calm and smooth. In this example you may have also noticed that every time the price pierces the 100 SMA, it bounces up without closing below the line. How many times in the past have you seen prices reversing direction like that for no apparent reason? Having the moving average indicator on your chart may indeed provide you with a basic, yet very powerful way to identify additional support and resistance points, or in helping to predict the next trend reversal.

However, remember that one indicator alone is unable to provide you with trustworthy trade signals. Always try to confirm your decisions by using other indicators, candlestick patterns, or fundamentals. Only when all enlisted confirmation means agree, then you can start thinking about taking the next step.

 

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