The Moving Averages in Forex

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The Moving Averages in Forex

The Moving Averages are a type of trend indicators. They show the average price of an instrument over a certain period of time. When calculating the Moving Average, there is carried out a mathematical averaging of the currency pair price during a given period. As the price changes, its moving average also increases or decreases.

Here is an example of a Moving Average with the period 14 (the red line):

chart in forex

If you know how to read the Moving Average (MA) signals, you can easily predict the future price behavior. When using this technical indicator, traders should keep in mind that:

– The greater the period of the moving average, the less sensitive the MA will get to changes in price action;
– Moving average with a very small period will generate a lot of false signals – it will just go after the price);
– Moving Average with a very large period is constantly delayed – it reacts too slowly;
– When there is a sideways trend, it is necessary to use moving averages with higher period.

There are 4 types of moving averages:

• Simple Moving Average (SMA) – the simple moving average is calculated by adding up the closing prices of the currency pair over a certain number of time periods (like 34 hours) and then dividing the sum by the number of periods.
• Exponential Moving Average (EMA) – the exponential moving average is calculated by adding to the previous value of the simple moving average (discussed above) a certain share of the recent close price. When using an exponential moving average, the recent prices have a bigger impact.
• Smoothed Moving Average (SMMA) – the smoothed moving average is calculated on the basis of a simple moving average, but it is more resistant to price fluctuations.
• Linear Weighted Moving Average (LWMA) – when the linear weighted moving average is calculated, the latest data receives a greater weight, while the earlier data have less relevance.

Weighted moving average is calculated by multiplying the close prices within the considered series, by a certain weight coefficient.

In the analysis of the chart, moving averages can form 2 main signals:

– The point of intersection of the moving average with the price action generates a Buy signal if the price crosses the moving average upwards and a Sell signal if the price crosses the moving average downwards.
– The general direction of the moving average indicates the current trend at the moment, so opening a position is recommended only in the direction of the current trend.

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