Probably the most frequently used indicator in technical analysis is the moving average. The concept of a moving average is that it shows the average value of a pair’s price over a set period. In other words, it measures what the average price of the pair is over a certain amount of candles. You may have a 20-day moving average placed on your chart, which will show itself in the form of a line. This line plots the average price of the pair over the last 20 candles, in this example – 20 days. Moving averages are often used to spot momentum and define possible support and resistance areas in a currency pair.

Moving averages are used to define the direction of a currency pair (its trend) and to help smooth out price fluctuations, sometimes called "noise" that can make determining the trend difficult in certain circumstances. As a general rule, bullish or upward momentum is confirmed when a shorter-term moving average (as an example, 10-day moving average) crosses above a longer-term average (perhaps a 25-day moving average). Downward momentum is confirmed when the shorter-term moving average crosses below the longer-term one.

While there are different types of moving averages, they are all used in the same general ways. The two most common types of moving averages that you will come across trading Forex are the simple moving average and exponential moving averages. The simple moving average is calculated using the simple formula of adding all of the values together, and dividing it by the period you are using. In other words, you simply add up all of the closing prices over the last (x) candles, and dividing it by that number. The exponential moving average is calculated in a complex manner that gives greater weight in the calculations to the most recent candles. Because of this, the exponential moving average is considered to be more predictive in a shorter-term chart, while the simple moving average will be slower to change, making it a better “smoothing mechanism”.

Published on 17th of June 2011
eTorro - Trading Starts Here

Start Trading Forex with up to $10,000

  • 100s Videos and FX Strategy articles
  • Advice from our FX traders
  • Practive free with using real time