Forex technical analysis indicators: simple moving average:
In this lesson, we first need to introduce you to two types of moving averages:
- Simple Moving Average
- Exponential moving average
We will also teach you how to calculate these data, and introduce you to the pros and cons of the two indicators.
After you have learned about moving averages, we will teach you different ways to use moving averages and how to use them together in your trading strategy.
Simple moving average
The simple moving average is the simplest category in the moving average family. Simple moving average means that the closing prices of a specific period are simply averaged. The moving averages we generally refer to are simple moving averages.
Take a simple example.
If you plan to draw a simple moving average for the past 5 periods on the 1-hour chart, you need to add the closing prices of the past 5 hours and divide by 5. In this way, you calculate the average closing price for the past 5 hours. Connecting these average prices into a line, you get a moving average.
If you plan to plot a simple moving average for the past 5 periods on a 30-minute chart, then you need to add the closing prices of the past 150 minutes and divide by 5.
And so on…
Most graphics will automatically calculate the moving average. The reason for explaining the moving average calculation method is to allow us to better understand it so that we can better use it to guide our transactions.
Understanding how an indicator works means that you can adjust and create different trading strategies as the market changes.
Like most other indicators, the moving average also has a certain lag. Because it calculates historical prices, you rely only on the general trend of recent prices and the general direction of short-term “future” price movement.
The figure below is an example of how the moving average follows the price movement.
In the 1 hour chart, three simple moving averages of USD/CHF at different periods are drawn. As shown in the figure, the longer the simple moving average, the more obvious it will lag behind the price.
Note that 62 simple moving averages are quite far away from 30 and 5 simple moving averages.
This is because the 62 simple moving average is calculated by dividing the closing price of the past 62 hours by 62. The longer the simple moving average period, the slower it responds to price movements.
The simple moving average in the graph can show you the overall sentiment of the market in a timely manner. Here, we can see that the USD/CHF is in trend fluctuations.
In addition to simply showing the current market conditions, we can also measure the direction of future price movements by simple moving averages.
Through the use of a simple moving average, we can know whether the price is in an upward trend, a downward trend or range fluctuations.
However, there is also a problem with the use of simple moving averages, that is, when the market suddenly experiences large fluctuations, it may fail. When this happens, the simple moving average may send us the wrong signal, we may think that the new trend is about to start, but, in reality, nothing has changed.
In the next lesson, we will explain to you what this really means. At the same time, we will also introduce you to another type of moving average, which will avoid such problems.