How Are Moving Averages Used in Forex Trading?

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Forex traders look at charts in an attempt to spot underlying trends or patterns in order to potentially predict future movements in currency markets. However, this can be challenging with the various erratic market fluctuations. Some of the causes of these fluctuations are anomalies which are not really a part of the general overall structure of the current market. Forex traders use various computerized indicators in order to help sift through extraneous data in order to reveal underlying trends that may be moving the market. One of the most commonly used of these indicators are moving averages.

Construction of the Moving Average

The moving average expresses the average price for a currency pair during a specified period of time. For example, one would calculate a 50-day moving average by taking the sum of all the prices a currency pair closed at over the last 50 days. This number is then divided by 50 with the resulting data points overlaid onto a price chart, enabling forex traders to visually see possible underlying trends.

What Difference Does Time Frame Make For Moving Averages

One can customize the moving average to whatever time frame a person chooses. The most commonly used moving averages increments are 15, 20, 30, 50, 100 and 200 periods. The longer the time frame the less sensitive and less erratic the moving average will appear on the chart. Forex traders will usually experiment with several different time frames in order to eventually decide on which one he or she prefers.

Most technical indicators, such as moving averages, are flexible in how forex traders can use them in their trading plans. There are various types of trading strategies that involve using moving averages in a variety of different ways. Some of these are cross-overs, moving average ribbon, technical filters, moving average envelopes as well as many other options. However, it will be up to each individual forex trader to decide how what type of strategy to use with moving averages.

 
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LeBach PhamLe Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.

Sources:

http://www.investopedia.com/walkthrough/forex/intermediate/level4/moving-averages.aspx

http://www.investopedia.com/articles/technical/052201.asp

http://www.investopedia.com/university/movingaverage/movingaverages4.asp

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