Moving Averages

Moving averages depict an average closing price for a currency pair over a specific time period. Simple Moving Averages take all the specified time period into account and average out the data for the whole time period. Exponential Moving Averages also give the average price data for the same time period but pay more attention to the more recent market activity. To gain a general impression of market averages in a specified time period look at a Simple Moving Average, to have a more detailed picture of recent trading activity and how that may differ from the overall average use an Exponential Moving Average. If an Exponential Moving Average breaks from the Simple Moving Average and moves upwards it can indicate an upward trend, if it moves below a Simple Moving Average it can indicate a downward shift in the market.

Moving averages can be applied to different time scales. A fast moving average will apply to a small timescale such as a week, whereas a slow moving average will apply to a longer period of time such as a month. Fast moving averages will tend to be depicted above slow moving averages in a long trade and below a slow moving average in a short trade. The fast moving average shows more recent data whereas the slow moving average shows the average trend over a longer period of time. Timescales aren’t predetermined and can be chosen by the trader however popular choices are 10, 20, 50 and 100 days with these particular timescales often mirroring points of support or resistance. It is best to experiment with the time scale that works best for you as an individual trader and stick to that pattern.

Moving averages are best used in trending rather than range bound markets; the most commonly used averages are the 20-, 50- and 200-day averages. In practice moving averages can be plotted on a chart for any timeframe where data exists. In a trending market moving averages will show the average price over a set period of time through a Slow Moving Average, current or recent deviations from the trend will be clear from a Fast Moving Average. In a range bound market where there is little fluctuation both moving averages will be very similar, crossing over and intertwining at times to make a clear analysis difficult.

Any combination of moving averages may be used with fast and slow moving averages applicable to exponential and simple moving averages. Traders looking to initiate a position should look for the point where the moving averages intersect, this shows that the trend is changing to go either long or short. Traders should look to close a position when the moving averages intersect again as this indicates once more the end of the current trend, either long or short. There are no hard and fast rules about the number of moving averages to use. Some traders may use one moving average others may use up to three moving averages. It is generally recommended to use at least two moving averages so the point of intersection can be used as an indication of when to open and close a trade.

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