Moving Averages Indicator Definition In Forex Trading explained for you, Moving averages is the widely accepted financial indicator used by the traders and investors for charting. Like every other indicator, Moving Average is also use to forecast future prices. These are easy to understand and plot on a chart. It is a simple way to predict price movement over time. Moving Average is a successful tool of the Forex market and can help you to make money in the currency trading if it is used correctly. Those traders who do not know how to use Moving Average correctly lose their money in trading. Most of the pro Forex traders frequently use Moving Average for charting.
Moving Average is calculated by taking the average of closing prices of any currency for the X periods where X represents the number of periods. Now the question that can worry the traders is what should be the length of the period to calculate the moving average. See some examples below.
Moving Average of 5-20 days of is useful for short cycle.
Moving Average of 20-60 days is useful for identifying intermediate trends.
Moving Average of 200 days or more is useful for long term trades.
The length of the period of Moving Average has nothing to do with the aim of moving average. So the aim of Moving Average is same whether the period is of 5 days or 200 days. Upward momentum in the price of a currency is confirmed if the average of a short term period of at least 15 days crosses the long term period and moves higher. Downward momentum in the price of a currency is confirmed if the average of a short term period of at least 15 days crosses the long term period and moves lower than it. See an example in the figure below.
The calculation of Moving Average is very simple. The closing price of the currency is added and divided by the value of the period. As mistakes are possible with every concept so mistakes are possible with Moving Average also. The two most common mistakes that the beginners make while using Moving Average for the Forex Trading are explained above.
Use of Moving Average as a Leading Forex Indicator
If novice traders are using Moving Average for trading then they should understand that they should not use Moving Average as a leading indicator because Moving Average is a lagging indicator and not a leading indicator. If you are using Moving Average then you should combine it with other useful indicator such as Stochastic. Use of Moving Average with Stochastic can be best to achieve desired level of profit.
Use of Moving Averages for the very short term period should be avoided
Moving Averages can give the best results if used correctly by the traders and investors. Use of Moving Averages can give the best results for the intermediate terms periods like 20-60 days or long term periods like 200 days or more but some traders also use it for short term periods that may be less than 10 days. Use of Moving Averages for the very short term period cannot be beneficial so the traders and investors should avoid depending on Moving Averages for very short term periods. Some day traders also use Moving Average and their period is too short and sometimes traders use hourly moving averages so such use of this method is useless and can give only losses. Traders can never benefit from an incorrect use of Moving Averages and if they blame the concept for their loss then that is wrong because they are themselves responsible for their loss because they used the concept incorrectly.
So if traders and investors want to earn profit from this widely accepted financial indicator they should avoid using Moving Average as a leading indicator and should also not use it for short term periods or day trading.