Odds are you are already very familiar with the moving average (MA) as a trend indicator. The moving average adds a factor to any chart you’re analyzing to show exactly where price action is happening. There are plenty of strategies to apply to the forex moving average, so today we’ll go over a few key things and address which moving average indicators you should pay particular attention to.
What Are Moving Average Indicators, and Why Do They Matter?
Moving averages exist to lag current prices. What this means is that there are two values on the screen at any given moment: one is the actual price, and the other is the MA. These two values differ—for example, in a bullish market, the MA will be below the current price, and in a bearish, it will be above. There are plenty of types of moving averages for traders to study, including the exponential moving average (EMA), the simple moving average (SMA), and more.
Simple Moving Average
The SMA reflects the closing prices for the candles in the period in question. It is achieved by dividing the average closing price by the period considered. The SMA is a simple approach to getting to the heart of the market and moving averages, but it has been proven to be effective and reliable.
Exponential Moving Average
Unlike the SMA, the EMA focuses on the current price, reducing the lag by weighting the recent prices a little more heavily. Because of this, EMA is more accurate due to its calculation and weight on current pricing in the market.
Volume Weighted Moving Average
The VWMA is another simple moving average, this time focusing on the volume traded during a considered period. It offers insight into supply and demand, allowing traders to know when to buy and sell. This in turn allows them to recognize when a new trend is about to start or an old one is about to end.
However, volume is considered irrelevant in a lot of forex trading, as it only shows that particular broker, not the market as a whole. What this essentially means is that the EMA is more valuable to a trader because of the current market pricing.
Displaced Moving Average
Relatively new to technical analysis, the DMA is another example of a simple moving average. Essentially, it’s an SMA “hack” or “cheat.” It’s the same formula as the SMA, but the outcome is shifted in time, forward or backward, resulting in important resistance and support areas. But, there is a catch, hence the use of the world “displaced”, as it isn’t always clear how much to shift. The results can be random and somewhat unreliable.
Trading is, ultimately, all down to probability. There is no easy win method to forex trading, and good traders realize this very early on. Instead, they focus on discipline, hard work, and knowledge. Moving averages offer a lot of advantages because they’re visual and they work more often than not, meaning that traders tend to end up on the right side of the market instead of losing out. When it comes to selecting a preferred moving average indicator, the SMA should likely take precedence over others. However, all moving averages are useful in some fashion, so doing your research prior to use will help you identify which best suits your trading style and approach.
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.