Introduction

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.

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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