Forex Technical Analysis Articles - Moving Average Based Indicators - What is A Moving Average?

Technical Analysis

1. Introduction

2. Calculation

3. Trend Identification

4. Generating Signals

5. Double Crossover Method

6. Support and Resistance Levels

7. Conclusion

The moving average is one of the most widely used technical indicators because it is versatile and easily constructed. It serves as a device to follow trends in the movement of a currency (or stock). Its purpose is to identify and signal to a technical trader that a new trend, a sustained movement either up or down in the currency, has begun or that an old trend has ended or reversed. The reason trends are easier to see using a moving average is that it acts to smooth the volatility inherent in looking at the price action alone to recognize trends. Overlapped with the price action the moving average produces buy and sell signals to the analyst or trader. The signals have a lag to market conditions, therefore a moving average is a trend following indicator.

Figure 1 - A 21 period simple moving average laid on top of EUR/USD price action.

The solid red line presented in figure 1 is a 21 period, simple moving average of the Euro in relation to the US Dollar. The period being considered is 30 minutes, which means that every candle represents 30 minutes worth of price data. The figure shows roughly two full days of price movement for the EUR/USD pair. The mechanics of periods and how a moving average is constructed comes next.

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Table of Contents

1. Introduction
The moving average is the simplest technical indicator.

2. Calculation
Explains how moving averages are constructed. The difference between simple and exponentially smoothed moving averages are also examined.

3. Trend Identification
Moving averages are used to analyze and gauge trends. They are not as effective in generating signals during trading ranges also knows as a sideways market.

4. Generating Signals
How to use moving averages to generate buy and sell signals. The period and how it controls the sensitivity of the moving average's signals is explained.

5. Double Crossover Method
Using two moving averages at the same time to create trading signals in a method called the double crossover method. Using High and Low Prices to create moving averages.

6. Support and Resistance Levels
The moving average can also be used to plot areas of support and resistance. Price action often bounces off a long term moving average in a sign of a continuing trend.

7. Conclusion
Moving averages can be used with filter rules as a way to limit whipsaw signals.