Forex Moving Averages: Trade with Forex Indicators

What are Moving Averages?
Forex Moving averages are a way of smoothing out prices for a specificed time frame. This could be a hours, days or weeks. If you are trading on an hourly basis, a 5 period moving average would be those 5 period prices added together and divided by 5. You might prefer to call this the mean.

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Remember we are using 'Forex Moving Averages' and not 'Forex Averages'. In 1 hours time another price point will have passed. You will have an extra price to take into consideration. To keep the same 'period' you will include this new price and lose the earliest.

This helped me understand:

Your last 5 prices are : 1+2+3+4+5 / 5 = 3
In an hours time you have : 2+3+4+5+6 / 5 = 5

The averages roll (or move) forward, keeping up to date with the newest price and losing the earliest. This is the basis behind moving averages and they create a smoothed graph that will sit on top of a typical Forex candlestick graph.

Simple & Exponential Moving Averages:
This is an example of a Simple Moving Average (SMA). Each price point has an equal weighting. Exponential Moving Averages (EMA) give more importance to recent prices (ie. the last price point is more important than the first. When the most recent price has greater influence, the graph is more responsive to changes (eg. a sudden spike) compared to an SMA which has a greater smoothing effect.

Using Forex Moving Averages
Using 2 or 3 forex moving averages with different time periods you can readily identify a trend that indicates a good time to open or close a trade. A short time period is a graph that responds rapidly to price change. Using longer forex moving average periods produce a greater smoothing effect, which is slower to react.

Without going into the 'why' - as soon as the fast line crosses your medium line - it is time to get interested. Once it crosses the slow line, it's time to look at trading. Of course there you do have to take into account the forex candlestick position, however that's pretty straight forward.

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