Moving averages (MA) are technical indicators used to determine a trend direction by many forex traders based on past performances of different currencies. The tool collects the total of financial security data points over a specific period and divides it with all the current data points to get an average.
The technical analysis tool gets the name “moving average” because it recalculates the average total points continuously based on current price data. Forex traders can use moving averages without pairing them with any other technical trading tool and get all the valuable results they need. However, they are also the best basis for many other technical indicators, including the moving average convergence divergence (MACD).
The two types of moving averages technical indicators used by forex traders are Simple Moving Average (SMA) and Exponential Moving Average (EMA). Each of the two technical indicators has its advantages and disadvantages.
Simple Moving Average (SMA)
Most forex traders, irrespective of their trading skill levels, prefer using SMA because of its simplicity and ease of understanding. Using the indicator tool involves dividing the accumulated total of data points over a set period with the number of periods basing everything on the current currency prices.
Furthermore, the indicator tool creates signals that alert traders when to enter and quit an active currency trading market. SMA computes the opening and closing times of currency prices and the lows and highs of the prices. The majority of forex traders apply 10, 20, 50, 100, and 200 average lengths to their trading charts, depending on their currency trading time zones.
· Advantages and Disadvantages of Simple Moving Average
- It is one of the least sophisticated forex trading tools making it easy to use even for first-time traders.
- Unlike other trading tools, it is not prone to fluctuations. Instead, the ups and downs of the currency prices do not affect the trading tool.
- It is one of the most reliable technical analysis tools for identifying market resistance and support points.
- It is one of the best trading start bases for first-time forex traders
- It helps to remove trading charts short-term noises
- It puts more emphasis on past price movements without acknowledging recent changes.
- Each price taken gets the same emphasis.
- It is not a practical trading tool for intraday and short-term traders
Exponential Moving Average
Forex technical analyst traders use the EMA as the other standard technical analysis tool. It focuses mainly on recent price changes based on their current data point’s responses. EMA traders use 19, 50, and 200-day lengths moving averages. The trading tool bases its buy and sell signals on historical average crossovers and divergences.
· Advantages and Disadvantages of Exponential Moving Average
- Unlike the SMAs, EMAs provide a better and less obstructed view of the market trends.
- It is more effective as it does a better job at acknowledging the most recent price changes.
- Because of the role the most recent highs and lows play, it is more helpful for day and short-term traders.
- Whether a market trend is in motion, losing its track, or even reversing, the exponential moving average is thorough in analyzing price movements.
- Compared to other technical trading tools, it is simple and just as easy to use
- You are more likely to get wrong signals when using EMA than SMA because of the effects of any recently created false price fluctuations.
- Unlike many other technical analysis tools, exponential moving average requires you to observe many of the older price points to make the best decisions.
Wrapping it up
If you are looking for the best way to understand upcoming market trends and complicated price charts, you should turn to moving average. It makes everything easier for forex traders, especially those trading for their first time.
However, you can only use the trading tool on the right assets as some can only work better with other technical trading tools. You should also carefully choose the trading time frame when using moving average because even the slightest change can mess up or change the results thoroughly. If you do not have a professional forex broker to help you with the moving average tool, you should do your homework before making any investment.