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Moving Average

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Learn Trading Forex Basic, Tutorial, and Guide. How To Trade Forex Moving Average shows averaged values of datas in a specific time period. Moving Average indicator can be used to identify trend and reversal points, support - resistance, or to help traders making decision from its crossovers. It also smooth out short term price fluctuations and removing noise.

Moving Average can be based not only on closing prices but also on the mean of high-low prices. Moving Average of closing prices are more suitable for daily analysis, while mean of high-low prices are more suitable for days traders.

There are 3 common types of Moving Average :
  1. Simple Moving Average (SMA)
  2. Weighted Moving Average (WMA)
  3. Exponential Moving Average (EMA)
Simple Moving Average (SMA) is calculated by adding up last price datas and devide them by N number of datas. For simplicity, simple moving average is a mean of N number of last datas.

Here is an example of SMA : 5 days past closing prices are 1+2+3+4+5=15, devided by 5 so the result is 3. If the next closing price is 11, then we will drop 1 (oldest data) so the new moving average will be 2+3+4+5+11=25, devided by 5, the result is 5, and so on.

Unlike Simple Moving Average which is unweighted, Weighted Moving Average (WMA) and Exponential Moving Average (EMA) both use weighted average calculation on price values, the difference is WMA's weight decrease arithmetically while EMA's weight decrease exponentially. In EMA, the weighting for each older data point decreases exponentially, giving much more importance to recent observations while still not discarding older observations entirely. WMA is rarely used due to its complexity.

Simple Moving Average Vs Exponential Moving Average
Exponential Moving Average (EMA) is a better trend following tool than Simple Moving Average (SMA) because it has two advantages :
  1. EMA responds faster than SMA
  2. Faster EMA reponds allow trader to catch early trend and trading opportunity better than SMA
  3. EMA gives more weight to last trading days
  4. Last trading days are more important and relevant to traders than longer past days.
  5. EMA doesnt drop older data like SMA does
  6. EMA maintains older data which will fade away with passing time, while SMA drops off oldest data continously.
Forex Trading Tutorial and Guide - Moving Average - SMA Vs EMA

Longer Vs Shorter Moving Average Period
  1. A shorter Moving Average is more sensitive to price changes and allow trader to catch early trend but often gives more false signals
  2. A longer Moving Average is less sensitive to price changes but produces less false signals.
Forex Trading Tutorial and Guide - Moving Average - SMA at different periods

Utilizing Moving Average
  1. To Identify Trend and Reversal Points
  2. An uptrend is confirmed when :
    1. Price chart is above Moving Average line while Moving Average is heading upward (There is only 1 moving average), or
    2. Price chart is above Shorter Moving Average Line and Shorter Moving Average is above Longer Moving Average Line (There are more than 1 moving averages).
      Price Chart > Shorter MA > Longer MA
    An downtrend is confirmed when :
    1. Price chart is below Moving Average line while Moving Average is heading downward (There is only 1 moving average), or
    2. Price chart is below Shorter Moving Average Line and Shorter Moving Average is below Longer Moving Average Line (There are more than 1 moving averages).
      Price Chart < Shorter MA < Longer MA

    Forex Trading Tutorial and Guide - Moving Average - EMA Identifying Trend

  3. Crossover Trading Signal
  4. A bullish (buy) signal is indicated by a Shorter Moving Average Line crosses a Longer Moving Average Line, and Shorter Moving Average is above Longer Moving Average Line.
    Shorter MA > Longer MA (Buy Signal)

    A bearish (sell) signal is indicated by a Shorter Moving Average Line crosses a Longer Moving Average Line, and Shorter Moving Average is below Longer Moving Average Line.
    Shorter MA < Longer MA (Sell Signal)

    To avoid false signal, it is recommended to combine Moving Average Crossover Signal with other indicator, or use more MA different periods at strong trending market. For example 10 days MA > 50 days MA > 100 days MA -> Buy Signal

    Forex Trading Tutorial and Guide - Moving Average - EMA Crossover Signal

  5. Support and Resistance
    1. Moving Average can be used as Support Level when Price chart is above Moving Average Line
    2. Moving Average can be used as Resistance Level when Price chart is below Moving Average Line

    Forex Trading Tutorial and Guide - Moving Average - EMA acts as support level
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