Understanding Moving Averages
Moving averages (MA) are technical indicators that are used frequently in foreign exchange trading. Often, MAs are used over 200, 100, 50, and 10 day periods. MAs are lagging indicators meaning that they do not forecast the price direction. Instead, they only provide data showing where the price has previously been.
Calculating Moving Average
Moving average is the estimated average of any subgroup of numbers. The calculation is done through a technique that helps you determine a general concept of trends within a data set. When traders master the Moving average formula, they can start calculating subgroups to find their moving average. The calculation of moving average can be done for varying periods and this makes it quite essential when it comes to predicting both short and long-term trends.
To calculate the moving average all you need to do is to compute the group of numbers and divide the result by the total number of characters within the group. For instance, if you want to calculate a five-year period of MA, you can compute the numbers across that period and divide your result by five. The MA is nearly the same as determining the middling value of a group of numbers. The difference, in this case, is that calculation of the average is done at different times for different subgroups of data.
How do Traders Utilize Moving Averages?
Utilizing moving averages can be crucial when it comes to technical analysis strategies. Using different techniques at the same time results in short and long-term predictions. Traders can calculate moving averages manually. They can also use them in various chart evaluations. Further, forex traders can use MAs to determine resistance and support levels. It’s worth mentioning that there are two key types of moving averages. These are simple moving averages (SMA) and exponential moving averages (EMA)
Moving Average Strategies
Here are some of the moving strategies that forex traders should know.
· Moving Average Envelope Strategy
This strategy comprises portion-based envelopes that are set below or above moving average. The MA type that is positioned as the envelope footing hardly matters. In this case, forex traders can use an exponential or simple MA.
Forex traders should analyze different time intervals, percentages, and currency pairs to figure out how they can apply the envelope strategy effectively. You are likely to see envelopes across 10 to 100-day durations using chains that are slightly distant from the moving average of between 1-10% for periodic charts.
In the case of day trading, the envelopes will usually be lesser than 1%. Forex traders may want to change their day to day percentage settings based on volatility. Use settings that complement your strategy to the day’s price action.
· Moving Average Ribbon Trading Strategy
Forex traders can use the ribbon trading strategy to develop a fundamental forex trading strategy depending on a slow conversion of trend difference. Trades can use this strategy in collaboration with a trend change in either downward or upward direction. The innovation of the MA ribbon trading strategy relied on the notion that more is better in terms of planning moving averages through a chart.
The ribbon is made by an array of between 8 to 15 exponential moving averages varying between long-term and short-term averages. Traditional sell or buy moving average signals are similar to crossover signals that are used with varying MA strategies. Numerous crossover signals are involved and forex traders should select the number of crossovers that make a great trading signal.
Traders can even use an alternate strategy to increase the profit potential of low-risk trade entries.
Moving averages are easy to use and they can be effective when it comes to determining ranging, trending, or corrective environments. Many times, traders use more than one MA because doing so can often be used to trigger a trend.
For example, when the short moving average crisscrosses over the slower, longer moving average, the action can be perceived as a signal to enter long. The long trading bias remains active until the moving averages change or hit the target.
Moving averages can play a big role in eliminating the noise caused by random price fluctuations and clear it to reveal the average value. Moving averages come in handy to recognize trends and validate reversals.