The FX Bootcamp Guide to Strategic and Tactical Forex Trading

MOVING AVERAGES

A moving average (MA) is an average of a predetermined number of prices (such as closing price) calculated over a number of periods (such as 55 candles). The higher the number of candles in the average, the smoother the line is.

A moving average makes it easier to visualize price action without statistical noise. Instead of watching the up and down behavior of every candle, you are watching the relatively smooth moving average line. Moving averages are a common tool in technical analysis and they are used within all time frames: 1-minute, 5-minute, 15-minute, 30-minute, 60-minute, 120-minute, 240-minute, daily, weekly and monthly candle charts, for example.

It is important to observe that a moving average is a lagging rather than a leading indicator. Its signals occur after the new price movements, not before. Moving averages do not think ahead. They tell you what has happened, not what will happen. Nonetheless, moving averages have a critical role to play in properly planning your trades in advance. The past does not always predict the future, but it sure likes to repeat itself.

SMAs vs EMAs

There are two types of commonly used moving averages:

1. SMA: The simple moving average or arithmetic mean.

This moving average is only an average. Add up all the candles that you’d like to measure and then divide by the number of candles you added together. For example, a 21 SMA is calculated by adding the closing price of the last 21 candles and then dividing by 21. ...