Moving Average (
MA) is one of the most popular, most followed and old trading indicators. It is used extensively by all kind of traders including forex traders and
stock market traders. MA is a chart
smoothing indicator showing the average value of the price changes for a currency pair or security for a period of time. Generally a MA is named after the number of period of time it represents. Eg: 50 MA shows the average values of 50 periods/days.
Traditionally there are two types of moving averages; and are usually used on same chart simultaneously - they are
short-term and
long-term moving averages. As indicated by name a short-term MA shows averages of a shorter period of time like 10 or 15 days and long-term MA shows averages of a longer period of time like 50 or 60 days.
Analysis of moving averages are very easy and straight-forward, when short-term average
crosses above long-term one, then the upward momentum of currency pair or security is confirmed and when it
crosses below the long-term MA, downward momentum is confirmed. Moving averages are also used in
forex trading to find out long and short term
support and resistance levels where the number of times the price hit a moving average increases the validity of support or resistance level.
Moving average is a very good indicator to analyze existing and past market movements, but it does not predict anything about the future. It is good tool for confirming trends and trend changes and for placing stop-losses and placing entries but is a poor tool for setting targets, exit points or profit levels. There are many variations of moving averages available - simple MA, Exponential MA and Weighted MA.