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Friday, January 8, 2010

Moving Average - Utilizing The Moving Average Forex Indicator

By Prema Laga

The Moving Average is definitely one of the more popular technical indicators in the forex markets. many forex trading strategies would employ the apply of a moving average in some way or another.

Determining the direction of the trend is the major apply of moving averages. It does this by smooths out price action on the charting software. It can also be utilized to identify support along with resistance levels and various types of moving averages are usually utilized in conjunction with one another.

There are two chief kinds of moving averages commonly employed today. They are the simple moving average (SMA) as well as the exponential moving average (EMA). Simple moving averages are formed by adding up a number of period points in addition to averaging them.

Any new data points are incorporated in the average while older points are ignored. Period data points can be configured by the trader. For instance, a 20 period simple moving average is simply an average of the newest 20 data points.

The EMA was created as a response to the fact that forex traders were finding flaws in the SMA. In a SMA line, all the determined period points are given equal weighting. The EMA is somewhat different as it puts more weight on newer data points while putting less importance on older ones.

Because of the differences in weight, the EMA will always respond earlier to sudden movements or trend changes in the market. This can be seen if you plot a 10 period SMA and EMA over one another. You will see that the EMA is always the first to respond sharply. Short term changes in trend are easily spotted by the EMA because of this. On the other hand, the SMA is utilized in long term trends. The moving average can be used in a hundred different ways by the trader.

Finally, moving average indicators are what as known as lagging indicators. Lagging indicators always do badly in markets that are side trending. Most forex traders avoid using moving averages in side trending markets as a consequence. - 23208

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