Moving averages

Moving averages are used to smooth the price data to form a trend following indicator. Though not useful in predicting the direction of a currency, it does help in defining the direction with some lag. It is a good tool to filter out noise and reassure support and resistance levels.

Trading considerations

1. Moving averages are lagging indicators because they use historical information. Using them as indicators will not get you in at the bottom and out at the top but will get you in and out somewhere in between.

2. They work best in trending price patterns, where an uptrend or downtrend is firmly in place. Using a crossover moving average as an indicator is considered to be superior to the simple moving average because there are two smoothed series of prices which reduces the number of false signals.

3. Moving averages do well in trending markets but they generate many false signals in choppy, sideways markets.

4. Indicators that are well suited to working with moving averages include the MACD and Momentum.

The are 3 types of moving averages in use:

1. Simple moving average (SMA)
2. Weighted moving average (WMA)
3. Exponential moving Average (EMA)

SMA and EMA are used more than WMA.

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