Moving averages are one of the most common technical indicators.
A moving average is just a method of smoothing out price variations to aid in distinguishing between ordinary market “noise” and trend direction.
By “moving average,” we imply taking the average closing price of a currency pair over the previous ‘X’ number of periods.
It might appear like this on a graph:
As you can see, the moving average appears as a squiggly line on top of the price (represented by Japanese candlesticks).
A “chart overlay” is a form of technical indicator.
The moving average (MA) has been overlaid on the price chart!
A moving average (MA) indicator, like any other technical indicator, is used to forecast future prices.
But why not simply glance at the pricing to see what’s going on?
The reason for utilizing a moving average rather than merely looking at the price is that, aside from Santa Clause not being real, trends do not move in straight lines in the actual world.
A moving average smooths down the random price swings and allows you to “see” the underlying trend.
The reason for utilizing a moving average rather than merely looking at the price is that, aside from Santa Clause not being real, trends do not move in straight lines in the actual world.
A moving average smooths down the random price swings and allows you to “see” the underlying trend. The slope of the moving average might help you estimate the trend direction.
Moving averages, as previously said, level out price activity.
There are various varieties of moving averages, each with its own amount of “smoothness.”
In general, the smoother the moving average, the slower it responds to price fluctuation. The faster the moving average reacts to price fluctuation, the choppier it is. To smooth out a moving average, take the average closing prices over a longer time period.
How to Choose the Proper "Length" of a Moving Average
The “length,” or the number of reporting periods that include the moving average computation, influences how the moving average appears on a price chart.
The shorter its “length,” the fewer data points included in the moving average computation, and hence the closer the moving average stays to the current price.
This limits its utility and may provide less insight into the overall trend than the present price. The longer it is, the more data points are included in the moving average calculation, which implies that each single price has less of an impact on the overall average.
Price fluctuations may become “too smooth” if there are too many data points, and you will be unable to spot any form of trend!
In either case, it can be difficult to predict if price direction will alter in the near future.
As a result, it’s critical to choose a length (or periods) that gives the level of price detail required for your trading term.
We must first discuss the two major forms of moving averages in this section:
1. Simple
2. Exponential
Before we go any further, keep in mind that moving averages smooth price data to create a trend-following technical signal.
They do not foretell price direction; rather, they define current price direction with a lag.
Next Lesson: Simple Moving Average (SMA) Explained
