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MOVING AVERAGES

 

When do you use moving averages?

 

You use moving averages to confirm the direction of a trend. Moving averages have the interesting characteristic of canceling out possibly misleading data (also known as “noise”) so that the real trend can be revealed.

 

How do you calculate a moving average?

 

The simplest way is to sum all the closing prices for a currency pair over a given number of time periods, and then divide the total by the number of time periods. So it is really just like calculating any other average, except that it then gets recalculated by moving the same number of time periods one along, then two along and so on. That’s what makes it into a moving average.

 

Why are there different types of moving averages?

 

It’s because there are different ways of calculating them according to the kind of trend you want to identify. In Forex trading, it may be more interesting to put more emphasis on more recent price activity, than on less recent price activity, and a different kind of moving average can be calculated on this basis.

 

Where does a moving average help you to trade?

 

Different traders have their own ways of using moving averages for this, but often traders will start to sell when a currency rate moves below its moving average, or buy when it rises above its moving average.

 

What is the Moving Average Convergence/Divergence indicator (MACD for short)?

 

The MACD indicator uses a combination of two moving averages to indicate whether a currency exchange rate is likely to go up or down. One of the moving averages is faster to react to price changes and therefore more erratic, whereas the other one is slower and smoother. If a new pricing trend starts, the line on the graph corresponding to the faster moving average will cross over the one corresponding to the slower moving average. It will then start to diverge again, either upwards if the pricing trend id upwards, or downwards if the pricing trend is downwards.

 

How reliable is the MACD indicator?

 

MACD is what is known as a lagging indicator. It can be a good indicator of the currency price trend, but at the same time there is a delay between what is really happening and the indication then given by the MACD.