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One of the first indicators that traders will often learn is the moving average. Moving averages are simple to calculate, easy to understand, and can provide quite a few different utilities to the trader.

And this will be expressed on the chart, much like price itself. Looking at price movements expressed as an average can present quite a few clear benefits; primary of which is that the wide variations from candlestick to candlestick are modulated by looking at the average price of the last X periods. Traders often have the question of whether or not price is too high, or too low — but by simply looking at the average price for this candlestick in consideration of the prices over the last X periods , the trader gets the benefit of automatically seeing the bigger picture.

Or perhaps traders will imagine that if two moving averages crossover, some special event may take place.

There are quite a few different flavors and flairs of moving averages. The most basic moving average is the Simple Moving Average, which we explained the calculation of above.

Traders will use quite a few different input periods for moving average for a number of different reasons. The most common moving average is the period MA, and many traders like to apply this to the daily chart. It is of the belief that most trading institutions; banks, hedge funds, F orex dealers, etc. Whether it is true or not can, unfortunately, not be substantiated as most of these institutions keep their trading systems and practices proprietary.

But one look at this indicator on any of the major currency pairings can seemingly prove its worth. The chart below will highlight some of the interesting price action that can take place with the period moving average applied to a daily chart: This is thought to be a faster moving average since fewer input periods are used, and the primary effect is that this moving average will be more responsive to more near term price movements.

The picture below will show how the 50 period s moving average stacks up to the Some traders commonly use numbers from the Fibonacci sequence as moving average inputs, as shown in my scalping strategy in the article Short Term Momentum Scalping in the Forex Market. Out of trader necessity to more closely follow near term price movements, as many traders feel recent price changes to be more relevant than older price variations, the Exponential Moving Average will place higher importance on price values registered more recently.

Since more recent prices are weighed more heavily than older price swings, the indicator becomes more adaptive to the current price environment.

Best Moving Average for Day Trading - Tradingsim

A comparison of Simple in red and Exponential in green period moving averages. Since moving averages provide the luxury of showing us price in consideration of the last X periods, we have the luxury of being able to observe tendencies which we may be able to take advantage of. Nowhere is this more prevalent than when using this indicator to define trends, which is often the most common application of the moving average.

If price action is consistently residing above its moving average, with the moving average inevitably pulling higher to reflect these increasing prices — traders can consider the chart to be showing an uptrend.

As we were able to see in the above picture of the period moving average, peculiar events can take place when price interacts with one of these lines. As such, many traders will look to moving average intersections as opportunities to buy up-trends cheaply, or to sell down-trends when price is thought to be expensive.

The thought being that while an uptrend takes a break by moving lower, down to its average, traders can jump in while price is relatively low. The picture below illustrates further: Some traders will take the utility of the moving average a step further, hypothesizing that when two of these lines cross, something may happen. When this happens, some believe that price will continue moving in the direction of the crossover. You can follow James on Twitter JStanleyFX.

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