Moving Averages is something that every Forex trader should know about. Understanding the ins and outs of it can help every trader make proper decisions when making their operations. These averages can help evaluate and determine the historic price of a currency or an investment. They can give a clear vision about the fluctuations of an asset because they take out the random movements out of the picture smoothing the time curve to offer more insightful data about the asset behavior.
Forex trading has evolved a lot since the early days. Technical analysts have developed a wide variety of indicators that can be used to analyze operations, but Moving Average is still frequently used because it’s practical, useful and simple to use. Using Moving Averages can help traders to identify the accurate price of an asset and the price trends over time, along with other valuable properties like resistance and support.
But… What’s a moving average?
To make it simple, Moving average is an indicator that incorporates all past price points and then averages them to provide a better comprehension of the behavior of any given security over time. Within the Moving Average types, we can find many of them, being the main ones the Simple Moving Average, also known as SMA and the ex
A moving average is an indicator with historic qualities that gathers previous price points and then averages them to provide a technical analyst with a better sense of where an asset went over a period of time. There are a few different moving averages, the most popular being the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). Each one of them providing useful information for the investor.
To calculate the SMA, you need to collect the final closing prices of security in different training sessions over time. While this might sound kind of complicated it’s actually really easy.
If we would like to determine the 30-day SMA of USD/JPY, you can simply add the closing prices over time and then divide it by 30. A simple average calculation that you have been using since your high school days.
The hardest part of the process would be having to monitor the closing prices of the asset every day. While this might sound like an easy task, imagine calculating a 200-day SMA! That would require you focusing on the closing price of a very specific asset for 200 days straight.
EMA is different and it’s calculation it’s a little more complicated, but it gives more prominence to the recent values in order to minimize the lag effect that’s produced over time. The first step is to select a time period, let say 20 days and then you need to calculate the SMA for that period of time.
Now, you must select a multiplier that will give the emphasis to the most recent data points. It’s important to know that this multiplier will depend on how long the EMA is. There’s a formula you can use to calculate this multiplier:
- Multiplier = (2/(number of time periods) + 1)
- For a 15-day EMA: (2/(15 + 1)) = 0.125 or 12.50%
- For a 30-day EMA: (2/(30 + 1)) = 0.0064 or 6.4%
Once you have your multiplier, you use another formula to determine the EMA.
- Multiplier * (closing price – EMA (day before)) + EMA (day before)
Taking advantage of Moving Averages.
When a trader has calculated Moving Averages for an asset, they can be used for a wide array of purposes, the main one being determining the trend that an asset is following. Let’s that a pair of currencies are following a rising trend. A smart investor would want to identify these trends and then capitalize on them. But a currency pair can also do the opposite and go down for a period of time. When this happens, people that own this currency are losing money.
Smart investors know many different ways to make money when a pair is rising or descending in value, therefore, knowing the trends beforehand can be really helpful to make informed decisions and maximize profit.
Maximizing the power of the Moving Averages.
It’s important to know that FOREX traders might have different needs when it comes to analyzing trends. If an investor is interested in long term investing he might want to use bigger times frames like 200 hundred days or even more. This will provide useful information on how the proper behavior of the asset.
On the other hand, if an individual is focusing on short term trading, a smaller window of 10 or 20 days might be more useful to him since this will give more information on how the asset performed in a short period of time.
Another common use of the Moving Averages is to determine the momentum of the price of any given pair. This helps to determine how quickly is ascending or descending in price. This can determine the momentum of the security and can shed some light on determining if the pair will keep the behavior in the same way for a certain period of time.
When a trader can determine the momentum of a pair he can then make informed decisions whether to buy or sell the asset. Momentum allows the investor to examine the asset performance in the short, long or medium term. If an investor is interested in the behavior of the EUR/USD in the short time, he can use a 20=day EMA or SMA. If heeds a more detailed performance over time, he can then use a bigger time frame like 100 days or even more. t all depends on the needs and requirements of the investor.
Moving averages are a piece of data that can very helpful when the time to make a decision comes. It is easy to calculate, it provides a ton of information and can be used for smaller and longer periods of time.
Knowing how to use the Averages can make a big difference in the profits on an investor and remember that is not enough by knowing how to calculate them, you need to be able to understand what is going on behind those averages in order to make the best decisions.
Spend some time learning about these averages and how to use them and your will earnings will sky-rocket with ForexPundit.