Understanding Moving Average Method
Moving Average Method is a forex indicator to smoothing the price movement in order to give the picture of average price movement.
(we will upload the picture soon)
Similar to other indicators, moving average method is used to predict the coming price movement. By seeing the ankle formed, you will likely to know where the price movement goes.
There are some types of moving average, each with different level of smoothness. The smoother output created by moving averages, the slower that moving average response to the price movement, and vice versa.
Simple Moving Average (SMA)
What is the simple moving average?. Simple Moving Average (SMA) is the simplest moving average method. SMA calculates the moving average by adding the data of prices during an “X” period of time, and then divided by “X” number.
Examples:
• If you want to make 5 SMA periods in 1 hour forex charts, you need to add 5 data of closing price (every hour), and divided by 5.
• If you want to make 5 SMA periods in 10 minutes forex charts, you need to add 5 data of closing prices (every 10 minutes for the next 50 minutes) and divided by 5.
The Forex Trading Charts software provided by broker will commonly give a help to various SMA automatically. All you need to do is determining the value of X and the calculation detail will be done by software.
Similar to other indicator lagging, moving average goes slower (because of the delay), so what is meant by a forecast is not knowing the coming price movement 100%, rather it is a tendency of increasing or decreasing price.
(we will upload the picture soon)
Here’s the explanation of the use of moving average method. In the chart above, you will see 3 different SMA. You will also see that the bigger SMA periods, the slower they will be compared to the actual price. 62 SMA is for left behind compared to 30 and 5 SMA. It happens because the use of bigger periods will likely to smoothen the movement. In 5 SMA, the movement is similar to the actual price movement.
Exponential Moving Average (EMA)
Even tough simple moving average method (SMA) is a very good technical analysis tool, SMA has a disadvantage. It is fragile to “spikes”, or sudden price increasement.
We will see the following example. We will use 5 SMA periods in the daily chard of EUR/USD. The closing prices during 5 days in a row are as follows:
Day 1 : 1.2345
Day 2 : 1.2350
Day 3 : 1.2360
Day 4 : 1.2365
Day 5 : 1.2370
A simple moving average method will calculate them as follows:
(1.2345 + 1.2350 + 1.2360 + 1.2365 + 1.2370)/5=1.2358
Isn’t it too simple? However, what will happen if on the second day the price moves wildly to 1.2300 so that the final result of SMA will also decrease to 1.2348.
The sudden price movement on the second day will influence the SMA calculation that will lead to the value of SMA forecast to be no longer valid.
SMA is too simple and not capable to overcome/handle a forex market with unpredicted price movement (lots of spikes). That’s why SMA is not too valid to predict the price movement. To anticipate the disadvantage of SMA, another alternative is created. It is exponential moving average method or EMA. EMA gives different emphasis on each price. As in the example above EMA will give bigger portions to the third to the fifth days, which means that the spike in the second day is not too crucial to EMA.
(we will upload the picture soon)
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Similar to other indicators, moving average method is used to predict the coming price movement. By seeing the ankle formed, you will likely to know where the price movement goes.
There are some types of moving average, each with different level of smoothness. The smoother output created by moving averages, the slower that moving average response to the price movement, and vice versa.
Simple Moving Average (SMA)
What is the simple moving average?. Simple Moving Average (SMA) is the simplest moving average method. SMA calculates the moving average by adding the data of prices during an “X” period of time, and then divided by “X” number.
Examples:
• If you want to make 5 SMA periods in 1 hour forex charts, you need to add 5 data of closing price (every hour), and divided by 5.
• If you want to make 5 SMA periods in 10 minutes forex charts, you need to add 5 data of closing prices (every 10 minutes for the next 50 minutes) and divided by 5.
The Forex Trading Charts software provided by broker will commonly give a help to various SMA automatically. All you need to do is determining the value of X and the calculation detail will be done by software.
Similar to other indicator lagging, moving average goes slower (because of the delay), so what is meant by a forecast is not knowing the coming price movement 100%, rather it is a tendency of increasing or decreasing price.
(we will upload the picture soon)
Here’s the explanation of the use of moving average method. In the chart above, you will see 3 different SMA. You will also see that the bigger SMA periods, the slower they will be compared to the actual price. 62 SMA is for left behind compared to 30 and 5 SMA. It happens because the use of bigger periods will likely to smoothen the movement. In 5 SMA, the movement is similar to the actual price movement.
Exponential Moving Average (EMA)
Even tough simple moving average method (SMA) is a very good technical analysis tool, SMA has a disadvantage. It is fragile to “spikes”, or sudden price increasement.
We will see the following example. We will use 5 SMA periods in the daily chard of EUR/USD. The closing prices during 5 days in a row are as follows:
Day 1 : 1.2345
Day 2 : 1.2350
Day 3 : 1.2360
Day 4 : 1.2365
Day 5 : 1.2370
A simple moving average method will calculate them as follows:
(1.2345 + 1.2350 + 1.2360 + 1.2365 + 1.2370)/5=1.2358
Isn’t it too simple? However, what will happen if on the second day the price moves wildly to 1.2300 so that the final result of SMA will also decrease to 1.2348.
The sudden price movement on the second day will influence the SMA calculation that will lead to the value of SMA forecast to be no longer valid.
SMA is too simple and not capable to overcome/handle a forex market with unpredicted price movement (lots of spikes). That’s why SMA is not too valid to predict the price movement. To anticipate the disadvantage of SMA, another alternative is created. It is exponential moving average method or EMA. EMA gives different emphasis on each price. As in the example above EMA will give bigger portions to the third to the fifth days, which means that the spike in the second day is not too crucial to EMA.
(we will upload the picture soon)
Thank you for visiting our blog Learn Forex Trade ..
Read More about Technical Analysis:
- Technical Analysis in Forex Trading
- Forex Trading Charts
- Japanese Candlestick Patterns
- Forex Pattern Recognition
- Hammer and Hanging Man Patterns
- Support and Resistance Indicator
- Forex Trendline Indicator
- Forex Channel Indicator
- Fibonnaci Squence Golden Ratio
- Understanding Fibonacci Squence
- Fibonacci Retracement
- Which are is better between SMA and EMA?
- Forex Trading Common Indicators
- What is Bollinger Bands?
- What is MACD?
- What is Parabolic SAR?
- What is Stochastic Oscillator?
