The moving average technical indicator is perhaps the most widely used indicator by traders in technical analysis. Its popularity is due to its ability to help provide a view on the most likely direction of the markets. It is also a useful predictor of trend changes.
The MA as it is often referred to, smooths out the daily fluctuations of price movements and is described as filtering out ‘market noise’.
It presents the trader with an average view of price movement over the selected time period. This can then be used to help determine the most likely market trend.
Moving Average Technical Indicator
Here are five key things you need to know about Moving Average trading strategies in order to use it effectively as part of your Forex trading analysis.
The Moving Average Shows The Average Change In Price
Moving averages show the average change in price of a market over the selected time. When the price action of an asset moves away from its moving average then the trend is deemed to be strengthening. On the other hand when the asset price moves closer to the moving average the strength of the trend is seen as weakening. Piercing a moving average is seen as a confirmation of the change of trend
Configure Over Multiple Time frames
They can be configured for multiple time frames to show the average movement over the selected time period. Moving averages which are set to run in higher time frames, commonly 50, 100 and 200 day averages are seen as more reliable indicators of market direction.
A Choice Of Moving Average Calculations
The moving average has several variations, each which aim to provide the trader with a more accurate reading of the market. The most commonly used are the SMA (Simple Moving Average), the EMA (Exponential Moving Average) and the Moving Average Crossover Indicator. The EMA proves popular as its calculation gives greater weight to move recent prices analysed.
A Lagging Technical Indicator
While they are popular, they can only provide information as to where the market has been and not where it is likely to go. As a result they are termed as ‘lagging technical indicators’. Traders will often set more than one moving average on their chart with the lower time frame average being used as an early indicator of trend change.
Identify The Trend
Due to the fact that the moving average is used to indicate trends, it is more reliable when markets are trending than in those which display volatility. If this is the case they can be prone to proving false signals. However in this environment they can still be used for providing levels of support and resistance which traders can use as entry points for short term moves in the market.