Moving averages

Moving averages

Moving averages are probably the most popular technical indicators used to identify the trend direction at the Forex market. They provide very definitive measures of support and resistance because they can be calculated mathematically with great precision. Moving averages tend to filter out the random noise in market data by smoothing out the great troughs and peaks of price movement. MAs make it easy to recognize/visualize the underlying trend on the chart.

There are different types of MAs. The simple MA, the most common one, shows the average price over a certain time frame. But it has a deficiency. It is a lagging technical indicator and tends to trail behind the current market price. So, when quotes are moving very fast, this lag effect can play a crucial role and cost you a fortune. A weighted MA tries to reduce this lag effect by laying emphasis on the recent prices and thereby allowing the MA to respond more quickly to the changing prices. There is also an exponential MA, which like the weighted MA gives more weight to the current market prices than to the prior price action.

Traders prefer to use 200-, 100-, 50- and 20 MAs. 200 MA helps to analyze the long-term trend, whereas 20 MA is more effective in analyzing the short-term price movements. If the market crossed 200 MA from bottom up, the technical picture for the pair becomes bullish. If prices slid below the 200 MA, there is a trend reversal.

When prices go above the MA it’s a bullish signal. In contrast, if quotes go below the MA it’s a bearish signal. If short-period MA goes above the long-period MA (for example, 20 MA rises above 50 MA), it’s a bullish signal. And if the short-period MA crosses the long-period one top down, it is a bearish signal.

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