Moving Average or MA is a trend indicator that is in the form of a line. It is calculated on an asset’s price changes. The MA helps a trader by confirming a trend. This curve on the charts mirrors the direction of the price, but the movements are smooth and cut out the more minor movement noises.
Determination of the forex market trend is essential for successful trading. Indicators assist a trader in determining the price direction of a market. Most trading platforms place oscillators at the charts’ bottom and in a different window.
Moving Averages are an average of the previous prices. Depending on the time frame considered, they move more quickly if they consider a shorter time frame, such as ten candles. They may also move slower if a hundred or more candles are the definition of average.
Most traders like moving averages as they have a substantial visual impact on the market’s state. Thanks to MAs, the traders can buy or sell in either a bullish or bearish market.
Current prices are lagged by moving averages, and there are always two values lotted on the screen-the actual price and the MA value.
The MA value is not the same as the actual price. In a bullish trend, the moving average is below the current price, while with a bearish trend, the MA is above the current price. Traders can use various types of MAs. An EMA (Exponential Moving Average), and SMA (Simple Moving Average), etc.
The best MAs for day traders include:
The SMA averages the closing prices for the candles in a specific period. The MA levels are calculated by dividing the average closing price by the considered period. It is a very simplified approach to finding the state of a reliable market.
An Exponential weighted moving average place more focus on the current price instead of averaging the closing price. It minimizes the lag by adding more weight to current prices. Most traders do not understand the difference between the two.
The EMA’s calculation means it is nearer the current price and more accurate than the SMA. The two MAs form the base for other technical indicators like the Bollinger Bands, which use EMA. The Middle Bollinger Band (MBB) is an EMA
The volume-weighted moving average or the VWMA is an SMA that factors in the volume traded in that time frame. It is more accurate compared to the EMA formula. The volume reflects the imbalances between supply and demand. When a trader knows when and where the big wigs are buying or selling, they often know when a new trend is about to start or end.
The volume is a significant factor in knowing when the other market participants, excluding retail traders like central banks liquidity providers, forex brokers, or commercial banks, are buying or selling. It plays the part of an indicator that shows traders the actual direction of the market.
A Displaced moving average or DMA is a different example of an SMA. The reason is that traders discovered that multiple times, prices cut through different SMAs as if there was zero resistance or support.
This results in a price reaction from a bullish trend or a bearish trend level. To get over this, traders use a tactic that uses a similar MA formula for the SMA, but they shift the outcome either backward or forward in time. The result is that significant resistance and support areas end up using the same MA, which means that the tactic influences the results.
Trading is a play with probabilities. If you understand that there is no fixed manual to forex trading, you will be on the right track. The key to trading successfully is discipline and sheer hard work. Technical strategies can give you profits if you follow them and trade accordingly.
Most traders have a strategy but in theory and rarely follow their strategies. They trade on emotions and make disastrous decisions that only bring losses. Use the MA strategies to make more profits, and follow through with them to the end.