Moving markets is one of the parameters that can be used to determine prices in forex trading. Forex trading market is a dynamic global market that determines the foreign exchange rates for every market.
The market considers all the trading aspects of buying, selling and exchanging currencies at current or determined prices. The forex exchange market is the largest trading market in the world.
Large international banks and financial institutions are the biggest players in the forex market. Using the moving averages makes it easy for the forex market dealers to assist the international traders in making wise investments.
What Is The Moving Average?
The moving average (MA), is a simplified analysis tool that analysis the price data. MA continuously updates the average price usually taken over a certain period of time. The data can be taken at the intervals of days, minutes or weeks, depending on the trader’s prevalence.
Advantage of Using The Moving Average Tool
Using moving average tool in the forex market has the following advantages:
- A trader can filter out noises associated with fluctuating prices in the forex market.
- Moving averages are constructed in different ways to fit the diversities in the forex market.
- A forex market trader can easily identify the trend and direction of the forex market.
- Technical traders can use the asset prices cross over as trading signals when making decisions.
- Investors can use the moving averages to analyse other trading technical indicators.
How to Use Moving Averages in Forex Trading
You can become a successful forex trader when you know where to invest. You can predict the price that is moving by studying the direction of the moving average.
If the average is angled down, it means that the price is escalating. If the curve is angled down, then the overall price is moving down. The curve that moves sideways is an indication that the price is in a range. Moving average s can also be used as support or resistance of the process.
When moving average acts as a support, the prices bounce on it as a floor during an uptrend. A moving average can also act as a ceiling where price levels reach, and they start to drop again.
When the trend is down, the price is below a moving average. When the price is above a moving average, the price is up.
Studying the moving averages will help you to know when to sell or buy the forex currencies.
How to Calculate Moving Averages
The following are the different ways that you can use to calculate the moving averages:
1. Simple Moving Average
A simple moving average (SMA) is calculated by adding up daily closing prices of several days and taking their averages. For instance, you can take closing prices for say five days. The total of the five days is divided by five to get the average for each day.
The new average is added to the next average in a single flowing line. SMA will give you a visual impression of the daily prices at a glance.
2. Exponential Moving Average (EMA)
The EMA calculations are more complex because they use the weighted mean of the recent prices. However, the exponential moving average is sensitive to prices changes. Therefore EMA gives a more pronounced price change than SMA.
You need not worry because no manual calculations are required. The charting software and trading platforms will automatically do the calculations for you.
The Moving Average Length
The commonly used average lengths are 10, 20, 50, 100, and 200. These average lengths can be applied to any chart time frame say one minute, daily, weekly, monthly, or yearly.
As a trader, you will choose a time frame that works best on your time horizon. The effectiveness of the moving average depends on the time frame that you choose.
A shorter time frame reacts more swiftly to price changes than a longer time frame. However, a longer time frame benefits a long-time trader while a shorter time-frame is for a short-time trade. In the forex trading market, both the short-time and long-time frames are used for a clearer picture.