Using the Moving AveragePosted on September 19th, 2010 William No comments
One of the most popular forex indicators, moving averages are also one of the simplest to compute; however, professionals are always coming up with new strategies for using them! Here are a few of the basics.
Recall that the moving average is used to show the market's momentum. We can take the simple moving average, which is just the average closing price over the time period we're using. We can weigh the average, with more recent prices having greater weights; depending on how much more importance we want to place on recent events, we can use either linear or exponential weights. We also have the option of using all past prices, rather than just a limited number, but giving those in the distant past very low weights.
Moving Average Strategies
There are three standard methods that underly most strategies for interpreting the moving average. One of the most common occurrences is a crossover, meaning that the price has risen above or fallen below the moving average; in other words, the current price just crossed the average price. While this isn't incredibly useful, it can help when combined with other predictive methods.
While the moving average measures trends in the price, it can also demonstrate a trend itself; moving average trends can be used to decide when to buy or sell a currency. Again, this indicator is not particularly reliable by itself, but can be helpful when used in combination with other indicators.
The disadvantage of the moving average is that it takes time for a market event to show up, at which time it may have already ended. The advantages are that the moving average indicators are simple and easy to use; while they shouldn't be used as the sole indicator, they can certainly provide support to decisions based on stronger indicators the trader may have available.