Moving Average is a technical indicator that helps to smooth out price action.
It can be used to predict future price direction by looking at its direction movement.
The longer the moving average the smother it becomes and the slower it gets to reacting to price movements.
The shorter the Moving Average the rougher/choppier it gets and the quicker it reacts to price movements.
Moving Average is calculated by taking the average of closing prices of currency for the last X number of periods.
The three types of Moving Average include, Simple Moving Average(SMA), Exponential Moving Average (EMA) and Weighted Moving Average (WMA)
Simple Moving Average is more lagging compared to the other two.
It is calculated by adding up the last X period’s closing prices and then divide it by X periods.
The Exponential Moving Average reduces lag by applying more weight to the most recent prices and this depends on the periods of the Moving Average.
For shorter periods on an EMA you have to put more weight to current prices.
The Weighted Moving Average has more weight on the most current prices and less on the old price data.
It is calculated by dividing the number of each day by the sum of number of days × the security value.
A part from identifying a market trend,Moving Averages can be used to identify support and resistance levels and measure price momentum.
For example if the Moving Average is rising and the price is above the Moving Average, it is an uptrend and if the Moving Average is falling as price moves below the it, it is a down trend.
When the shorter Moving Average diverges quickly from a longer Moving Average, it indicates a rise in momentum.
But when the two Moving Averages are converging as price pulls back, it is an indication of a slow down in momentum.
A cross over of Moving Averages is a signal for a change in trend.
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