Moving Average (Moving Average) is probably the most widespread and the most effective indicator on the Forex market. The area of application of this technical indicator is vast, and quite a lot of other indicators have been created on its basis. In forex forums and in trader’s slang, moving averages are denoted either by the initial letters ‘MA’.
What do moving averages represent?
What is a moving average? It is an arithmetic average of the price over a specific, defined period of time. The arithmetic mean can be calculated by the opening or closing price of a bar, or by the minimum or maximum price value.
Simple moving averages
Usually, simple moving averages (SMA) are derived from the average price value for a certain period of time. This period is called the period (the number of bars taken to calculate the MA) and the inertia of the moving average depends on its value. The greater the value of the period, the smoother the MA moves.
Weighted moving averages
Considering Weighted Moving Average (WMA), we can say that it is a kind of modification of simple MAs, as the basic principle of calculation is the same, but with the introduction of a significance coefficient. The closer the calculated period is to the current price, the more importance (weight) it has. The price chart shows that having the same period, the weighted moving average is more sensitive to price fluctuations.
Exponential moving averages
Despite the name: Exponential Moving Average (EMA). – is also a kind of modification of the weighted moving average. But for its calculation, the price of the previous period is taken into account, without dependence on the time interval under study, when setting the value of the moving average period. This calculation allows to get a smoother moving average.
Determination of trend
Using moving averages, you can visually determine the presence of trend movement on the price chart. If the moving average moves with a slope, the trend is present, and the steeper the angle of slope of the ‘MA’, the more pronounced the trend movement is. If the ‘MA’ is in a horizontal position or the slope has a small angle, we say that the price is moving sideways (flat).
Moving averages with different periods
Probably one of the simplest trading strategies is based on the application of ‘MA’ with different periods. As a signal for opening (closing) a position the crossing of ‘MA’ is used. A moving average with a smaller period is usually called a ‘fast moving average’, a moving average with a longer period is called a ‘slow moving average’.
If the ‘fast MA’ crosses the ‘slow moving average’ from bottom to top – this crossing can be perceived as a signal to open a long position (opening a BAY order). If there is a mirror crossing of moving averages, we can consider a sell signal (opening a CELL order).