Forex trading is getting popular these days with the availability of various tools that help in buying and selling of the stocks and securities with ease. Traders use Forex trading indicators to get signals to enter and exit from the trading market. Various types of trading indicators are provided by the trading platforms but most of the traders prefer to use the technical trading indicators. This type of indicators makes use of the mathematical calculations which help the traders to get the trend analysis on the basis of the numbers. Thus, close trends are analyzed with the help of technical indicators. There are four types of technical indicators among which moving average is one of the best forex indicators.
Moving average forex trading indicator
Moving average is the common indicator which helps to smooth out the fluctuations. This helps in understanding the difference between the typical market fluctuations and actual reversal rates. It is based on the events which have already happened. It is helpful in identifying the support and resistance levels.
Types of moving average indicators
There are basically four types of moving average indicators which can be used to determine the trend. These indicators include:
- Simple moving average: It is the arithmetic mean of the closing price of a security over a period of time.
- Exponential moving average: When more numbers are added to the existing data, the moving average is calculated exponentially. The formula for calculation is complex.
- Smoothed moving average: In this, price values beyond the time period are considered.
- Linearly weighted moving average: The weight is calculated in geometric rather than linearly in arithmetic series.
Calculating the moving average
It is very simple to calculate the moving average to determine the trend. The closing prices of the last “X” years (time period) is summed up which is then divided by the number of years i.e X.
Reasons for using long-term moving averages
There are certain reasons for using long-term moving averages. Some of them are:
Determine the long-term trend: Price charts are quite different to understand by the traders. So, many corrections prevent the traders to have the overall picture and lose their trend tracking. Various types of ups and downs in the trend affect the trend analysis. Thus, long-term trend analysis helps in retaining the focus of the traders and enables them to get skilled in determining the trend for the long term.
Helps in making a decision: Price is helpful to respect and stop the long-term trend of moving average levels. The levels of moving average help in making critical decisions. If the long-term moving average is broken by the price then reversal is possible, while when the price slowly bounces towards the moving average, the price can break. However, with the strong bounce of the price range at the moving average then trend continuation is expected. The response of the price with respect to the long-term moving average is helpful in getting valuable information related to the trading.