Reading Moving Averages

[RichardCox 10]

Forex traders relying on technical charting strategies have a wide variety of indicators options to choose from when developing a strategy. This can be especially daunting in some cases (particularly for newer traders), so it can be useful in these cases to look at common practices of more experienced traders and to at least have some understanding on the technical indicators that are most commonly used by the seasoned experts.

This does not necessarily mean that all traders should actively use the same indicators but it can be useful to see and understand the information that is being viewed (and reacted upon) by the majority of the technical trading community.

 

This can help to give a better sense of where supply and demand areas are clustered, and this can be invaluable in determining whether or not breakouts or range bounces are likely to continue or are simply “false” in nature. At some point, most traders find moving averages (in some form) on their charts. This is generally because moving averages are so often discussed in trading circles and because of their usefulness in identifying trend outlook and momentum direction. Once traders have a firm understanding of how moving averages are commonly interpreted, it can be surprising how quickly different examples of price behavior where before these signals were largely invisible. Situations like these are often responsible for turning the opinions of people who were otherwise skeptical of the advantages of technical analysis strategies as a whole.

 

SMAs vs. EMAs

 

When compared with other technical indicators, it can generally be seen that moving averages have more variations than what is typically seen with technical analysis tools. The two broadest characterizations can be seen in Simple Moving Averages (SMAs) and Exponential Moving Averages (EMAs). First, SMAs are calculated by adding the closing price of a currency pair over a set amount of time intervals, and the by dividing the sum by that number of time intervals.

 

EMAs, however, give a greater weight to more recent closing periods. The calculation of EMAs is slightly more complicated but the main point to remember is that EMAs essentially show a faster reaction to more recent price activity. But there are similarities between the two as well (as the name suggests) as both SMAs and EMAs can aid traders in visualizing the dominant trend as they smooth out the price activity in an objective manner.

 

Variations in Time Intervals

 

While some technical traders prefer to use SMAs and others prefer to use EMAs, there are some additional factors to consider when making a decision on which type of moving average to monitor. Specifically, this comes in selecting which time intervals to monitor. In this area, there is a much wider variation in trader activity, with some traders looking to watch shorter term intervals (such as a 10, 20, or 21 day moving average) and others opting to watch a longer term interval (such as a 50, 55, 100, or 200 period moving averages).

 

The examples in the previous paragraph generally mark the most commonly used intervals, but there is no standard that says any of these will necessarily work better than the others. To be sure, some traders will invent their own interval, and base the number of periods on some other technical factor (such as in using a Fibonacci number).

 

Interpretations

Interpreting moving averages can make technical analysis generally deals with viewing the relationship of the price next to the moving average readings. Positive momentum is seen when prices are above a moving average while negative momentum can be found when actual price activity is seen below. When viewing more than one moving average at a time, a shorter term moving average heading above a longer term moving average gives a bullish signal while a negative crossover is an argument for a sell position.

 

Additionally, the direction of the moving average itself can be informative, as a moving average that slopes upward is bullish while those sloping downward are bearish. In the attached example, we can see a bullish scenario, supported by the break in prices above the 100 and 200 period EMAs, which is followed by an upward crossover of the 100 EMA relative to the 200 EMA. During most of this scenario, both moving averages slope upward, again supporting the bullish perspective.

[Colonel B 10]

Seriously?!?! Its really hard to believe people use this lagging crap and make money?

[Obsidian 10]

still there are lots of people who use MAs to determine the current trend