Moving averages are a well-liked signal that many traders incorporate into their strategy. Moving averages have shown to be highly helpful, and traders need to be aware of this. Indicators of many different practical kinds are also employed in the currency market. You may read about moving averages, how to use them in your strategy, and their benefits and drawbacks in the following article.
What are forex moving averages?
Moving averages (MA) are technical indicators commonly used in forex trading. The main goal of this indicator is to smooth out market prices and fluctuations to distinguish the direction of market trends from other movements. The value is recalculated every day and that’s why we say ” moving ” in the name. MA is used in a specific period chosen by the trader.
All this can be very helpful, especially when combined with other indicators to make an efficient strategy. Short-term fluctuations in price can reduce the effectiveness of your strategy, so moving averages can be useful.
Calculating moving averages
Forex moving averages can be calculated in different ways depending on the goal you are trying to reach. There are differently used moving averages based on the period. There are 200-day, 100-day, 50-day, and 20-day moving averages. The length of the period can affect the results that you get. In short-term trading, short-moving averages are used. On the opposite side long-term trading, the longer moving averages are used.
The two major types of forex moving averages are:
- Simple moving average (SMA)
- Exponential moving averages (EMA
Simple moving average (SMA)
A simple moving average is calculated by taking the arithmetic mean of a set of values over a chosen period. This means a set of numbers or prices are added up and divided by the numbers of prices in that set. The formula for this calculation is:
Where A is the average in period N, and N is the number of periods.
Exponential moving averages (EMA)
The calculation of Exponential moving averages (EMA) is different from simple moving averages. The first step is to calculate the SMA over a specific period. Next, the smoothing factor is calculated, which is the multiplier for weighting the EMA. A formula can summarize this as so:
EMAt is the EMA today
Vt is the value today
EMAy is the EMA yesterday
s is smoothing and d is the number of days
Exponential moving averages offer more weight to prices to be more responsive to new data.
Using moving averages in your forex strategy
The main reason forex moving averages are used in strategies is to be able to identify the direction of market trends. Many strategies have been made with the use of moving averages. Keep in mind that you can not rely on MAs alone to identify market trends, but other technical analyses and research must be made.
Some of the strategies concerning moving averages are :
- The moving average cross-over strategy
- The triple moving average strategy
- The moving average ribbon strategy
Using the moving averages you will see the line which smooths out the random price changes. When it is rising it indicates that there is an uptrend. If it declines this indicates a downtrend happening. All this helps you determine the direction of the trend.
Benefits and drawbacks of moving averages
For everything, there is a good side and a bad side. Moving averages are no exception from this. The following are all the things that would make you use averages or not.
Benefits of forex moving averages:
- Smooths out the data and any fluctuations in price
- Simple to interpret and understand the movement
- The calculation is easy to do on your own
Drawbacks of Forex moving averages:
- Not predictive and fully reliable
- False indications may happen with weighted moving averages
- Issues with price turbulence
Conclusion
Moving averages (MA) are a popular indicator in the forex world. It helps traders to analyze and identify future trends. Allpips allows traders to easily use moving averages on their platform while trading with two simple clicks. The major types of forex moving averages have different formulas for calculation.
These main types are Simple moving averages and exponential moving averages. Allpips also offers smooth moving averages which will be discussed in another article. Moving averages have been used in many different strategies. Although this technical indicator has some limitations, it is often very useful.
