If you have been reading forex books or have attended any forex courses, you will find that the moving average is one of the most widely used forex indicators due to its simplicity and functionality.
So what is so simple about the moving average?
It is a visual tool that shows you the average historical value of the past x period. This allows you to have an understanding of the trend and the strength of the market.
When the moving averages are sloping UP, you are in an uptrend and when it is sloping DOWN, you are in a downtrend.
As for the strength of the market, you can make use of the gradient of the moving average to tell. If the MA has a steep gradient, this is usually a good indication that the current trend you are seeing is strong. However, if the gradient of the MA is very gentle, the trend you are seeing is pretty weak and there is no momentum in the trend.
Types of Moving Average
If you are serious about trading forex using the moving average, you must definitely spend sometime to learn the 2 type of moving averages that you can deplore.
Simple Moving Average: This is also known as SMA which is simply the calculating of the average value of the x candlesticks that you define. For example: if you want to plot a 20 SMA, what you are getting is in fact the average reading of the past 20 candlesticks.
Exponential Moving Average: This is also known as the EMA and the difference between this and the SMA is its consideration of the recency of the data in the calculation. For the calculating of the EMA, the more recent data will be given more weightage and this makes the EMA more dynamic and responsive to the market movement.
Personally, I prefer to use the EMA more than the SMA as it is more responsive which is more suitable for my trading plan. As can be seen from the figure above, you can see that the EMA moves faster than the SMA and thus it is more responsive to any price change. However, you can try them out and decide which one to use in your trading based on its performance.
In my next post, I will be going through with you how you can make use of moving average in forex trading.