The moving average (MA) is the most popular technical indicator in Forex trading. It is likely among the first indicators learned, and seen on most charts. The moving average is so common because it is simple, versatile, and easy to apply.
What is the Moving Average Indicator?
The moving average (MA) is a calculation to analyze data using the average change in a data series over time. It is a common technical analysis indicator that is used in identifying and spotting market trends. Moving averages represent continuously calculated values that change constantly based on the average price changes in a set period of time.
For instance, if we are using a 10-day moving average, the value then is the mean average of the price during the last 10 days. This value is variable and changes day by day, by discarding the oldest value in the data set and replacing it with the most recent value.
Moving averages mitigate price fluctuations by smoothing them out. So, they help in looking beyond transitory price effects and seeing the big picture and general trend instead.
They are trend-following indicators that are commonly used to identify support and resistance levels as well as the overall trend. The shorter the time frame for the moving average, the more accurate it is, as in longer time frames the lags become greater. However, in shorter frames, the MA is more sensitive to price changes.
How to Calculate Moving Averages
A moving average (MA) can simply be calculated by adding up the set of values and dividing by the total number of values in the set. For example, if you want to calculate the moving average for 20 days, add up the values over that period and divide by 20.
Moving averages are automatically calculated on forex trading platforms, so you won’t have to do it for yourself. AximTrade Metatrader 4 provides extensive tools for price analysis with a set of in-built technical indicators and charting tools.
Basic Types of Moving Averages
There are different types of moving averages out there, each is characterized by the way the data are weighted. The three basic and most common types of moving average (MA) are:
- Simple (SMA): It is the simplest formula of the moving averages, calculated by adding the set of values and dividing them by their count.
- Exponential (EMA): The calculation of this indicator gives more weight to recent prices.
- Weighted (WMA): It is a more complicated formula that assigns greater weigh to recent prices, calculated by multiplying the given price by its weighting and totaling the values.
Which Moving Average is More Effective?
Both the SMA and the EMA are very similar but different in their responsiveness to recent changes in data. The EMA gives a higher significance to recent values, while the SMA gives equal significance to all values.
It is believed that exponential moving average and weighted moving average are better trend identifiers since they give more weight to recent prices, which makes them more responsive to trend changes compared to the SMA.
Simple Moving Average, on the other hand, is considered to be more effective when it comes to determining support and resistance levels.
Price Analysis using Moving Averages
The primary value of using a moving average indicator is to quickly identify the direction of trend and momentum. Here are three tips on how moving averages help to identify trends and momentum:
- If the price moves away from the long-term MA, an overall trend is detected. Prices move higher in an uptrend or lower in a downtrend.
- If the price moves away from the medium MA, a short-term trend is detected.
- If the price moves away from a short-term MA, this reflects increasing momentum.
Moving averages trading techniques
1) Identify Trends:
The moving average is a trend indicator, meaning that the main function is to assess the price trend. Upward average usually refers to a bullish trend, while downward average points to a bearish trend. However, it is not that simple. You’ll have to assess the price action sometimes to identify the trend. When the price action aligns with the MA, this means the market is trending. On the other hand, opposing price action and moving is usually a sign that prices are slowing down and a trend reversal is expected. Learn more about Trend Analysis.
Yes, the slope degree can say a lot about the price action. A flat MA usually reflects a range (sideways) market and weak momentum. While a steep MA can be an indication of strong price action and is sometimes used as a sign of reversal.
3) Determining Support and Resistance:
Moving averages are commonly used as support and resistance levels. But this depends on how price action interacts with the MA. If prices slow down while testing the MA, it is more likely to find support or resistance.
Moving Averages and Technical Analysis
Using moving averages is an essential technical analysis method. They are applicable on different time frames and are included in many trading strategies. You can use them simply to smooth out price fluctuations, eliminating factors of volatility. The MA can be used to identify trends, resistance or support areas, entry and exit points.
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