There are 4 types of moving averages in Forex that you will encounter. The first is the simple moving average while the other is called an exponential moving average. And then there is the smoothed moving average and the weighted moving average. Ideally, they should be used in combination with one another to get the best results, but they are pretty powerful indictors when used on their own.
The difference between a simple moving average and an exponential moving average
As the name will surely give away, the simple moving average gets its name from being the simplest type of moving average you will find. What is important to know, is that this type of average is going to be rather vulnerable to spikes.
The other average, the exponential moving average, relates to the weight in the price. This average is going to put all of the emphasis on what it is that the traders are up to.
In Forex trader, what traders did yesterday or at any other time in the past, really doesn’t matter as much as what it is that they are up to right at this minute. This is because in Forex, the only thing that really matters is what is happening today. Although yesterday’s stats can help predict what will happen today, it is what is happening today that really counts.
When comparing simple moving averages with their counterpart, the exponential moving average, traders will instantly notice that the simple average is often the smoother of the two. This is because the longer it takes for an average to move, the smoother it is going to be, and often the simple average takes the longest.
But this does not mean that an exponential moving average is not without its many benefits. To start with, the exponential average can be immensely useful if you are looking for the best possible way to quickly spot a trend. The downside of this is that there are likely to be a few fake outs when using the exponential moving average.
When you look at a simple moving average, you will find that it is normally going to be a lot slower to respond to a price movement. This is not such a great thing for a trader because it might cause the trader to not take action quickly enough and as a result they would lose out on making a profit.
But, on the upside, the simple moving average is going to help you easily navigate spikes and fake outs which can in turn help you make a profit.
Smoothed Moving Average
The next type you might come across is the smoothed moving average. This moving average is going to use data from the set period of price values while also incorporating some important historical data with the understanding that the historical data will be of some value in the long run.
A smoothed moving average will be apparent when the exponential moving average and the weighted moving average are closer on the price chart than the simple moving average.
Weighted Moving Average
With this average, all of the attention is going to be placed on what is happening right now and as such will take into account the latest data. There are not all that many strategies out there that are purely based on the weighted moving average. In fact, these averages are the result of experimentation with the more simple approach.
How can a trader use a moving average to their advantage?
Traders use moving averages to help them make the right decisions when it comes to identifying a trend that could prove to be profitable, it can help them know when it is the right time to enter, and it can signal when the trend is going to come to an end.
One of the most common uses of a moving average is to plot different types. This will enable the trader to get a good view of both the long and the short term movements which will help them to decide the best strategy for their trading.
When it comes to identifying trends, using the moving average is without a doubt one of the best resources that you will have available to you. Doing this can be as simple or as complicated as you’d like.
To keep things simple, you can start by just plotting a single moving average. If the price is moving above the moving average, then you are looking at an uptrend. And if the price sits below the moving average, it is a downtrend.
The best way to approach these kinds of charts though is to not take the simplest possible route. You will have more success if you plot a few moving averages. This will help to clear things up and ensure that what you are looking at is actually a genuine uptrend or downtrend.
The moving averages are going to be used by traders as a universal indicator for them to analyse the financial markets they work with the most. This data forms a part of technical analysis and can be used not only for Forex trading but also commodities, futures, cryptocurrency, and CDFs.
By using the most basic of trading strategies, traders of all kinds, whether they are new to trading or not, will be able to gain valuable experience and make the most of their approach to trading.
Frequently Asked Questions
What are moving averages in Forex?
Go here for a comprehensive explanation of moving averages in forex.
What moving averages do banks use?
The Exponential Moving Average and the Simple Moving Average are most used.
What is the point of a moving average?
Moving averages are useful because they can determine the long term trends although they can also be used to calculate the trends for any period of time.
What are the different types of moving averages?
The four different moving averages are the Simple, the Exponential, the Weighted and the Smoothed moving averages.
Are moving averages effective?
Yes. Moving averages are effective because they can help the trader determine whether or not the investment trend is moving up or down.
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