This article looks at the use of moving averages with the foreign exchange rates.
There are many different technical indicators that you can use on the forex market. One of the most common is the moving average. It is important that you understand what this indicators is and how it can help you trade the foreign exchange rates. There are certain calculations that create the moving average that you should know about. However, as most moving averages come with the chart software you will not have to understand the actual workings behind the calculation.
What is a Moving Average?
If you are going to use moving averages when you trade the foreign exchange rates you need to know what these are. The moving average is terms as a trend following indicator which means that you are to be following the movements of the market. The indicator is a lagging indicators which means that the information you see has already happened on the market.
The simplest form of the moving average is the simple moving average or SMA. This is calculated with the arithmetic mean of a set number of values. However, this is generally done in the background and most traders do not deal with the calculations that make this indicator.
What is the Appearance?
The appearance of the moving average will be a curved line on the forex charts. The curved line is the visual representation of the calculation that has been done. The curves of the line will be determined by the movement of the market and the timeframe that you have set for the moving average.
When you set up the moving average you will need to choose a set day timeframe for the average to work with. The most common are the 20 and 50 day moving averages. This means that the calculation that is completed will look at information from the last 20 or 50 days of trading.
How to Use it With the Foreign Exchange Rates
When you use the moving average with the foreign exchange rates you are going to be able to determine what the market movement is. There are a number of ways that you can also use the moving averages to determine when you should be trading. The most commonly used method would be the double moving averages.
When you use this method you are going to have two simple moving averages that are working off different days. The first will be a shorter term moving average and the second will be a longer term moving average. When the two averages cross you will be given the signal to trade the foreign exchange rates.
The SMA and the EMA
When you look at applying moving averages you will notice that there are the EMA and the SMA. The SMA is the simple moving average and the EMA is the exponential moving average. The calculations that govern these indicators differ and this is why they offer you a different indicator. The EMA is more responsive than the SMA and you should consider this when you look at the use of moving averages.
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