The moving average is one of the most typical trading indicators. Despite other complex technical indicators existence, moving average occupies a significant portion of forex traders’ hearts.
Whether you conduct short or long-term trading, moving averages will suit your technical analysis. It constitutes the most crucial tool for fighting noise trading. Besides, moving average is known to solve the problem of finding the best tools for trading signals.
This article explains the kernel of moving average, explaining its types and calculations. From the workings, you will find it easier to figure out its role in forex exchange analysis. Let’s get started.
What Is Moving Average?
Moving average is a statistical tool for analyzing data points. It achieves its mission by creating subset series of averages of the total data. It has two types—simple and exponential moving averages. Here is how you find the moving average.
Calculating Moving Average
Simple Moving Average (SMA)
Say you want to find the simple moving average for 10 days. First, collect the ten days’ data. Assume the statistics are 23.96, 24.00, 23.84, 23.32, 25.00, 25.17, 25.99, 27.05, 27.25, 28.09.
Sum up the data. The total would be 23.96 + 24.00 + 23.84 + 23.32 + 25.00 + 25.17 + 25.99 + 27.05 + 27.25 + 28.09 => 253.67.
Divide the total by the days. 253.67 / 10 => 25.37.
This becomes your simple moving average for the 10 days.
Assume you want to find the simple average for the subsequent days whose last day reading is 29.01. The simple moving average would be (24.00 + 23.84 + 23.32 + 25.00 + 25.17 + 25.99 + 27.05 + 27.25 + 28.09 + 29.01) / 10, which is 258.72 / 10 => 25.87.
Exponential Moving Average (EMA)
EMA concentrates on long-term price changes to come with more comprehensive current price information.
For example, you may need to find the EMA for the 10 days over a year. You start calculation based on previous EMA because EMA must have a base calculation. That’s the EMA for the 10 days will take SMA for the 10 days as its base price.
Assume the previous EMA for the first 10 days of the year is the SMA we calculated in the above example, 25.87. Next, find the smoothing constant — emphasis of the most recent statistics.
Smoothing constant = 2 / (number of periods + 1) = 2 /11 => 18.18%.
EMA’s formula is
(closing price − previous day’s EMA) × smoothing constant + previous day’s EMA
Our EMA will use the first day’s data and 10-day SMA to find the 11th day’s EMA as follows:
(24 – 25.87) × 18.18% + 25.87 => 25.53. So, the EMA after 10 days (in the new year) is 25.53.
Here is the more exciting part:
Software calculates Moving Average for you. It then plots the changes on a curve for your forex trading strategic analysis.
It would help to know what happens under the hood, so it becomes easier to apply the valuable technology — in solving the most typical forex trading problems, as explained below.
Importance of SMA and EMA to Your Forex Trading
1. Accommodate Any Trading Period
You will realize that you can find a short or long-term forex trading trend from the above calculations. SMA presents the best short-term trading information, whereas EMA gives you a better currency price over a long duration.
2. Kick out Noise from Your Trading
Noise trading is the reliance on market opinions for making forex trading decisions. Using a data-driven strategy, such as moving average, lets you decide on your trading quantity.
3. Find Signals at Your Fingertips
Moving average enables you to control your forex trading. You let the artificially intelligent software gather statistics on your behalf by finding EMA or SMA and plots various graphs for you.
Better yet, it can analyze the trend for you. You can then automate buying and selling, stop-loss, and take-profit orders.
The 3 most familiar forex trading challenges are finding an all-period analysis indicator, addiction to noise trading, and not knowing when to use trade signals. The best part is that moving average solves the above problems.