How does Moving Average Help Forex Trading

What is a Moving Average?

In statistics there are three measurements to identify a single prominent (important) value that represents multiple items of related data; Mean, Median and Mode. They are measurements of Central Tendency.

For trading, a Moving Average (MA) is a computation of the statistical price mean or volume mean. It is plotted and displayed for human decision interpretation or incorporated into a computer program algorithm for electronic trading.

Application of the MA for trading includes concepts of Multiple Time Frame Confirmation (MTC), Support and Resistance, Momentum and Trend direction. A moving average line is important to understand price behavior. It is why many traders usually incorporate MA lines  in their strategy.

Moving Average Calculation

A Simple Moving Average (SMA) is the sum of all period closing prices divided by a set number of periods, its duration. It is calculated by adding all of the values of each price data item and dividing that sum by the total number of price items for that set number of periods. As the next time period completes the first time period is eliminated from the calculation.

Price data older than its duration is removed as new price data is available. Duration is a number of periods of time. A new MA is again calculated the next time period. Each successive MA calculation is connected to form a moving average line. Because of its continuous single line appearance it is also named a running average or rolling average.

There are exponential, weighted and linear MA lines. Each of these computations is based on the SMA equation with additional emphasis on more recent data that has been collected.

Moving Average Trading

Technical analysts use multiple MA lines of differing durations to determine how a market or security is performing. By displaying multiple moving lines of differing durations, those with sorter duration along-side those with longer duration, it provides multiple pricing views. They show how far price has over-extended.

Certain MA lines are used to identify important support and resistance on price charts. The longer a moving average line duration the greater its price support or resistance. The slope of the MA line is also important. A rising simple MA line while price is above the line and dropping tends to act as stronger support. A falling MA line while price is below tends to act as stronger resistance.

Each moving average line on a price or volume chart has a duration that is different from another MA line. Each line represents greater or less trading sentiment.

Observing shorter lines can demonstrate disagreement while longer lines are consistent in their direction. Shorter duration MA lines can weave in and out another without apparent direction. This confusing behavior is a bird’s nest. Price action is messy to interpret. Trading sentiment shows little strength upward or downward, a price range. There is no price momentum.

Trading and Sentiment

expert-forex-trader-deskSentiment deteriorates first by shorter duration MA lines. When all lines are layered, one atop another, shortest to longest or longest to shortest there is little disagreement of price direction. Sentiment is strong. Look for price pullback to a longer moving average line and then price continuation in the direction of that longer MA line. Many consider these pullbacks advantageous price areas to enter trades. Price is trading at a discount within a strong established trend and price tends to move aggressively from these price areas, the direction of that trend.

Never trade opposite the direction of MA lines. If MA lines are going up then average price is going up. If they are going down then average price is going down. The moving average calculations always lag since they are based on historical data points. The MA is not accurate to identify when price will stop its direction or begin to move an opposite direction. It should be combined with other technical analysis criteria.

The exception to the never trade opposite the direction of the moving average line rule is a counter-trend trade. A counter-trend trade is when price has risen or fallen considerably, sharply, in a short time period, and in the same direction of the trend. Price over-extends the prevailing trend of one or more of the longer MA lines. Price can exhibit elasticity toward those longer MA lines. This is Reversion to Mean Trading. A severe overbought or oversold condition should be obvious and can be confirmed using trading indicators or oscillators. Counter-trend trading requires significant experience.

Read more cellulite articles:

Previous post:

Next post: