Moving Average - Moving Average Indicator

Forex Indicators

• Bollinger Bands
• Fibonacci Retracement
• MACD
• Moving Average
• Exponential Moving Average
• Simple Moving Average
• RSI (Relative Strength Index)
• Stochastic

The Moving Average is definitely one of the more popular technical indicators in the forex markets. Most forex trading strategies would employ the use of a moving average in some way or another.

The primary role of moving averages is to get a better feel for long term market direction. It does this by smoothening our price action on the charting software.

It can also be used to identify support and resistance levels and various types of moving averages are usually used in conjunction with one another.

There are two major types of moving averages used in forex trading today. They are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).

The SMA is the most basic type of moving average that is calculated by taking a number of past period points, averaging them and plotting them on the chart. It is a moving average because as new price period data becomes available, it drops the last data period point and incorporates the new data in the average. Period data points can be configured by the trader. For example, if i chart a 10 SMA on the daily chart, it will give me the average of the 10 newest bars or candlesticks which is plotted on the chart.

The EMA was created as a response to the fact that forex traders were finding flaws in the SMA. The flaw has to do with how the SMA gives an equal amount of weight to each data point in the series. The EMA puts more emphasis on recent data points instead of the all the data points in the series.

Because of the differences in weight, the EMA will always react faster to sudden movements or trend changes in the market. This can be seen if you plot a 10 period SMA and EMA over one another. You will notice that the EMA is always the first to react sharply.

Generally, EMA is used to determine short term trend changes. Because the SMA reacts equally to all data points in the series, it is normally used in longer term trends.

There are hundreds of different ways that forex traders use moving averages to complement their trading strategies.

Lastly, moving average indicators are what as known as lagging indicators. This means the tend to do well in trending markets and not ranging markets. Because of this, most traders usually use this indicator when the markets are trending.