Traders are always looking for a tool that will accurately indicate the time you need to enter into a transaction to buy or sell. Even though all professional traders apply individual trading strategies, that have been repeatedly proven, they are still continually looking for simple methods to work effectively on the Forex market.
How to Apply the Moving Average Method
The use of the simple methods indicates a decrease in the losses and increase of the revenue. Moving Average deservedly belongs to such instruments because they are used in trading on the foreign exchange market by most of the traders to eliminate the noise and to find points of entry and exit from the market.
The moving average shows the average price of a currency pair over a certain period. When calculating the MA, a mathematical computation for a certain period of the average rate of currency takes place. Upon the change of the price, its average value is also subject to move either down or up.
MA on the chart shows the average price of a particular currency pair for the previous period, i.e., it smooths the price chart. With a higher number of periods for which the average is calculated, the corresponding graph will be more smoothed. Moving Averages curves are usually constructed based on the closing prices of currencies, although they can also be calculated on the base of the average of "High," "Open" and "Low."
If the price moves in a flat and ranges close to the moving average, it’s not recommended to open new positions.
In a shorter period, MA responds more quickly to price changes in the currency pair; however, at the same time, it will not be enough to filter "noise." For a more extended period, the moving average will neutralize the impact of the noise, but the response to the trend changes will be with delay.
Use of Moving Averages
As the technical indicator, the Moving Average is most commonly used in real trading. Usually, in such trading platforms like MT4, which are used for trading on demo and real Forex accounts, four types of moving averages are presented: simple, exponential, smoothed and linear weighted Moving Average.
MA smooths price data to form a trend indicator. They will not predict price direction but will determine the course of the price movement acting belatedly. Moving averages are starting to lag behind current prices because their value at all periods is based on the results of which currency had shown before. Regardless of this lag, moving averages can help smooth the change in prices of a currency pair and filter out noise.
This average is considered the basis for many technical indicators, for example, MACD and Bollinger Bands. Simple and Exponential MA can be used to determine trend direction, points of exit and entry into the market.
Like the other indicators, MA is used for facilitation for the trader ability to project future prices. Considering the angle of the slide, you are more likely to determine the direction and strength of the potential price movements on the currency market.
As already has been mentioned, this technical indicator refers to the leading indicators of the Forex market. However, until you do not decide for themselves, with clear rules of Moving Averages at work on demo accounts, it is not necessary to open a real trading account. Since otherwise, the chance to be among the losers will increase considerably.