Moving Averages – Online Forex Trading Tools
Yesterday I introduced you to math based indicators for forex online trading. Today, I’ll explain how moving averages are calculated and used for online forex trading.
There are three fundamental types of moving averages commonly used in online forex trading: simple, weighted, and exponential. These are commonly referred to as the SMA, WMA & EMA.
The benefit of moving averages is that they reflect longer-term changes in the price, effectively smoothing out day-to-day volatility (of course there are cool volatility indicators which I’ll share with you soon).
The more periods you include in your moving average calculation, the smoother the average line will be. I’ll discuss the periods online forex traders generally use for each type of moving average indicator.
The Simple moving Average (SMA)
The simple moving average is calculated just as you would calculate an arithmetic average of anything (take the sum of the parts, then divide by the number of parts).
The arithmetic average is recalculated at the beginning of each new period such that the same number of periods are always included (for example, if I were to calculate a moving average based on 10 periods of data, as soon as a new period closed, I would add that to the calculation as the 10th period and drop what was the 1st period). In this way the average moves with the market.
The Weighted Moving Average (WMA)
A weighted moving average weights more heavily more recent price data (the more recent periods received a larger weight than older periods do). The weight changes from day to day in order to more heavily weigh recent data.
A weighted moving average, while somewhat more complicated than the simple moving average, can be more useful because it offers more information about recent movement (which, in turn, can offer more information about future movement).
The Exponential Moving Average (EMA)
Another type of weighted moving average is the exponential moving average. While the weighted average is calculated using different weighting factors determined by the trader, the exponential moving average is weighted by multiplying a percentage of the current period’s price by the previous period’s average price. An exponential moving average can be a very useful tool in understanding the overall movement of the market over time, and in forecasting potential future movements.
Moving Average Forex Trading Notation
In many forex trading books, courses and seminars you’ll see the following notation:
- SMA(14) – a simple moving average calculated over the last 14 candles
- WMA(30) – a weighted moving average calculated over the last 30 candles
- EMA(60) – an exponential moving average calculated over the last 60 candles
This is a helpful way to show you how many periods the moving averages occur over. I also use this notation because it makes simple sense!
There are several different techniques that traders use with moving averages. Moving averages can be used as average price lines, which, if crossed, signal potential reversals. Moving averages can also be used together (two or more moving averages that incorporate a different number or periods) to generate buy and sell signals (this use is called moving average crossover).
I’ll be discussing moving averages ALOT in future blog posts. For today, I simply wanted to introduce you to them to make sure you were familiar with moving averages in your online forex trading.
Related posts:
- MACD for Online Forex Trading
- EMA Profit Divergence for Online Forex Trading
- MACD & Finding the Trend’s End
Tags: exponential moving average, forex charts, online forex trading, simple moving average, weighted moving average Posted in
Rapid Forex on 
Larry on 
Dan Onzo on 
Rob on
March 12th, 2010 at 4:42 pm
Nobody uses simple moving averages any more!
Ok, well some people probably do – But doesn’t an “exponential” moving average sound way cooler?
[Reply]
Rapid Forex
Reply:
March 18th, 2010 at 5:03 pm
yes, the exponential ones do sound cooler, and the way they are calculated actually makes more forex trading sense too
[Reply]
April 2nd, 2010 at 2:44 am
This lesson was a little disappointing. There is no mention of which moving averages are the best to use for forex or the entry signal when using them.
[Reply]
April 21st, 2010 at 6:41 pm
Can we use these moving average as trendline? eg.
14SMA = Inner trenline
30WMA = Outer trendline
60EMA = Longer outer trendline
Because it seems difficult to spot which levels to connect a trendline.
[Reply]
Rapid Forex
Reply:
April 21st, 2010 at 6:42 pm
@Kulvadee – yes, you can use those. They’ll work nicely
[Reply]
May 29th, 2010 at 8:19 pm
@Jeff Hokins–So wrong, my friend! SMA(50) and SMA(200) are used EXTENSIVELY by retail and pro traders alike. There are also some trading methods based on SMAs. In fact, I sometimes do a type of swing trading using three charts with SMA(25), SMA(50), SMA(100). EMAs actually tend to have more noticable choppiness than SMAs.
By the way, doesn’t “fractal based, quantum probablity directional indicator” sound way cooler than “exponential moving average”? “Cool” names don’t necessarily mean a thing.
For many types of trading, the difference you see in using SMA versus EMA is insignificant. If you are looking for crossovers, compare where SMA(10) crosses SMA(12) with EMA(10) crossing EMA(12).
[Reply]
June 2nd, 2010 at 10:52 am
Dear Mr Campbell
In your next post you tell what type & combination of MA is helpful for scalping,swing trade,short term & long term trade. Similarly what combinations of MA are used for these trades to buy/sell signals.
[Reply]
June 2nd, 2010 at 11:06 am
If the price is rising and it is above 60 EMA but below 100EMA. Can we analyse with confidence that it will reach 120 EMA.
[Reply]