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Moving Average Indicator in Forex Trading – How Does It Work?

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Every Forex trader should know the basics of technical and fundamental analysis. But to succeed in trading, you should master its rules, know trading patterns and be capable of forecasting market quotations. 

Many different tools will help you in this task – graphic charts, technical indicators, automated programs, trading signals, and much more. But it is vital to understand how they work to use them successfully in trade. And in this article, you will learn about the Moving Average indicator.

What is MA?

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Moving Average is a technical instrument that indicates the average price value for a set time interval. The average value is not constant and changes in the direction of the increase or decrease depending on the price’s behavior.

MA allows eliminating the so-called “market noise” or price fluctuation and reflects long-term trends. The indicator is displayed in the form of a continuous curve on the chart. 

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It is superimposed on the price curve. It allows the trader to quickly evaluate the current state of the market and understand which trend prevails at the moment.

MA is used for:

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  • Markets used: stock, Forex, derivatives;
  • Instruments: stocks, currency pairs, futures, etc.;
  • Preferred timeframes: from minute to weekly charts.

Types of Moving Average

This indicator has several types that differ only in the formulas:

All these indicators show the average price value for a specified period. And the main difference between the types of MA is the different coefficients used to receive the data. 

In the case of Simple Moving Average, all prices for this period have the same weight. Linear Weighted Moving Average and Exponential Moving Average make the latest prices more significant.

How Does Moving Average Work?

Moving Average is a widely-used indicator that is pre-installed in many terminals, so there is no need to download it. It is the simplest method to determine the direction of the trend. 

In a nutshell, this technical analysis indicator adds up all the prices for the previous periods and divides them by the number of terms. Thus, we get a graph that may display: 

  • High trend;
  • Low trend;
  • Flat period.

The trader can freely choose the period that he needs when creating a graph. Basically, you will see the following parameters:

  • Period – the number of candles that will be taken into account. The higher the period setting is, the less sensitive the MA will be.
  • Deviation – you can move it into the future or the past. It will be displayed on the chart by moving average moving downward or upward, respectively.
  • Price – the price that you specify in the parameters will be inserted into the calculation formula.  
  • Other settings – for example, flat and trend market parameters. It depends on the specific trading platform.

The moving average price is most often interpreted as a comparison of its dynamics with the price itself’s dynamics. Trading with the Moving Average indicator is quite simple. 

As soon as the curve on the chart crosses the MA line from top to bottom and is fixed under it, we can conclude that the price will fall for some time. It is an appropriate situation to open a sell position.

If the price crosses the MA from the bottom up and is fixed above it, it is worth thinking about opening a buy position. It only seems very simple, but in reality, the MA data alone can give false signals. So it is necessary to combine this indicator with other tools. 

Moving Average, like other analytical tools, has both advantages and disadvantages. On the one hand, it is evident and straightforward to use. This indicator is excellent for beginners to learn the specifics of the Forex market. But it is risky to rely entirely on the MA forecasts. It would help if you used signals from other algorithms for a more accurate prediction. 

Most experts consider it optimal to use two moving averages for better accuracy. Besides, all trend indicators combine well with oscillators like RSI, CCI, stochastic. These have advanced properties and ideally supplement MA data.

 

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James Musoba
James Musoba
Studying Africa's startup and technology scene. I always look forward to discovering new exciting inventions and vibrant entrepreneurs.

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