Moving Average–Based Indicators for Forex
Technical indicators are for predicting future market or price movement. They are highly technical and mathematical tool that analyze past data to obtain future prices. The moving average is one of the most basic technical indicators for forex. It can help you in identifying trends, when it smoothes price action into a single line. It generates the basic trading signals when price crosses the single line.
The moving average is one of the most widely used and popular technical indicators because of its versatile nature. The indicators can be constructed easily. With moving average, you can follow trends in the movement of a currency quite meticulously. It can identify a new trend, a sustained movement, either up or down, in the currency and can generate signal for a trader. The signals generated by a moving average has a lag to market conditions, therefore it is a trend that follows the indicator.
The moving average, as implicated by the name, is an average. You can choose the time periods in minutes, hours, days, or weeks. The most common of all is the 21-day moving average. Moving averages with shorter and longer durations are used and they have their own advantages and disadvantages.
Some analysts prefer to add more weight to the most recent data. In a 10-day moving average, the data from the 10th day, which is the most recent, would be multiplied by 10, the 9th day’s data by 9, and so on. Analysts also consider exponentially smoothed moving average to be better than the simple or linear averaging methods.
The main function of moving average is to identify the trend. You can simply examine the direction of the moving average for significant up or downward movements. You can also observe the price location. If the price is located above the moving average than the currency is in upward trend, but if the price is below the moving average, the currency is in a downward trend.