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MOVING AVERAGES
What are Moving Averages ?
Moving averages are one most commonly used technical indicators.
A moving average is simply a way to smooth out price fluctuations to help you distinguish between typical market “noise” and actual trend reversals.
By “moving average”, we mean that you are taking the average closing price of a currency pair for the last ‘X’ number of periods.
On a chart, it would look like this:
Moving Averages : Text
Like every indicator, a moving average indicator is used to help us forecast future prices.
By looking at the slope of the moving average, you can better determine the potential direction of market prices.
As we said, moving averages smooth out price action.
There are different types of moving averages and each of them has their own level of “smoothness”.
Generally, the smoother the moving average, the slower it is to react to the price movement.
The choppier the moving average, the quicker it is to react to the price movement.
To make a moving average smoother, you should get the average closing prices over a longer time period.
There are two main types of Moving average:
Simple Moving Average (SMA): A simple moving average is the simplest type of moving average in forex analysis. A SMA is the sum of last “X” period’s closing prices divided by that number by X. For example, if we had a 5 period SMA it would be calculated by adding up the closing price of the previous 5 candles and divide that number by 5. (A=price, p=period)
(A1+A2+A3...Ap)/p
Exponential Moving Average (EMA): the exponential moving average places more emphasis on what has been happening lately.This means that it more accurately represents recent price action.
(C – P) * (2 / (n + 1)) + P
where C and P are current data point and an exponential moving average of the previous period (simple average used for the first period) respectively
Moving Averages : Text
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