Thursday, November 1, 2007

Moving Averages - The Forex Trading Power Indicator

Every forex currency trader must know how to accurately interpret technical indicators in order to be a successful trader. Being able to consistently interpret currency trading technical indicators is the difference between forex trading success and failure. Moving averages are one of the technical indicators frequently used by forex trading pros. Let's discover what moving averages are and how they are useful for forex traders.

Moving averages are one of the most popular and easy to use tools available to the forex trader. While technical analysis is largely subjective, moving averages are mathematically precise and objective. One of the reasons moving averages are so popular is that they embody some of the most common stipulations of successful forex trading. Moving averages are extremely important for not only isolating trends, momentum, and support/resistance, but more importantly, for highlighting the underlying bias of the dominant trading cycles. Because the forex market is a spot market, moving averages are used to calculate the current average of prices, and can help traders make investment decisions on the spot.

Moving averages are a useful technical tool in a trending market. The reason for this is simple; they are considered by most analysts the most basic and core trend identifying indicators. It is designed to smooth out temporary price fluctuations and reveal the true path of the underlying trend. Moving averages may also act as support and resistance levels in a trending market. Some investors prefer simple moving averages over long time periods to identify long-term trend changes. When two moving averages are used together, the longer term moving average is used to help identify the trend, and the shorter one for timing purposes. When there is no trend, the moving averages are flat and are not of much use. Fortunately for forex traders the forex market is a trending market - a perfect market for utilizing moving averages.

There are five popular types of moving averages: simple, exponential, triangular, variable, and weighted. The two major types of moving averages are "simple" and "exponential". Simple moving averages are widely used, predominately because of its ease of computation. Simple moving averages apply equal weight to the prices. A simple moving average (SMA) is formed by finding the average price of a currency or commodity over a set number of periods of time.

Exponential moving averages (EMA) are by and large preferred when charting prices on the currency markets. Exponential moving averages reduce the lag by applying more weight to recent prices relative to older prices. The method for calculating the exponential moving average is fairly complicated. The important thing to remember is that the exponential moving average puts more weight on recent prices.

History has shown that when prices begin trading above the moving average line the market is becoming bullish and traders should be looking for buy entry points. When prices begin trading below the moving average line the market is becoming bearish and traders should look for an opportunity to sell. Investors typically buy when the price of currency pair rises above its moving average and sell when the it falls below its moving average.

Before ending this article let's review. Moving Averages are one of the most popular technical indicators used by traders charting the forex market. Moving averages are extremely important for not only isolating trends, support & resistance and momentum but more importantly, for highlighting the underlying bias of the dominant trading cycles. Master interpreting moving averages and other popular forex trading technical indicators and you will become a successful and wealthy forex trader.

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