During the last decade, there has been active development of Forex trading. Under the BIS research, the market was worth $1.934 quadrillion in 2016. And in early 2022, it’s valued at $2.409 quadrillion. Thus, high competition is in the Forex market today. Therefore, traders use every possibility to increase their competitiveness. Among the most popular tools, dealers note, e.g., Moving Averages (or MAs). Experts advise using such options under the control of reputable online brokers (such as FBS). Otherwise, dealers may lose their money.

What Should Be Known About Moving Averages?

MA is a simple technical analysis tool that smooths cost data by creating a permanently updated medium price. When calculating this index, the value is mathematically averaged over the period of interest to the trader. As the price changes, its mean value either rises or falls.

Types of Moving Averages

There are four MA kinds. Each type of this trading tool has individual features, for example:

  1. Simple MA (or SMA) is the arithmetic mean of a particular number of recent cost values. Its value should be periodically recalculated. Here, the oldest index of the period is removed from the calculations in favor of the newest one.
  2. Smoothed MA (or SMMA) is determined using the formula (SMMA(i-1)x(N-1)+CLOSE(1))/N. Here, ‘CLOSE’ is the closing price of a certain candle on the chart. ‘N’ is the number of candlesticks averaged when creating SMMA. Finally, ‘i’ is a candle to which parameters are applied in the count.
  3. Linear Weighted MA (or LWMA) is calculated by multiplying each of the closing prices under review by a certain weighting factor. Here, more weights’re assigned to the latest data, and fewer weights’re appointed to the earlier ones.
  4. Exponential MA (or EMA) is determined by supplementing a certain percentage of the current closing cost to the previous value of the MA. When applying this indicator, the latest closing prices have more weight.

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The point of intersection of a price chart with the Moving Average forms a buy signal if the price chart crosses the MA from the bottom up. And if the Moving Average is intersected by the price chart from top to bottom, this indicates the need to sell.

What Should Forex Traders Consider When Using MAs?

Here are some general tips to remember within applying Moving Averages:

  • MAs with too short periods generate a large number of false signals;
  • the longer the MA period, the less sensitive it will be to price changes;
  • MAs with too long periods permanently lag.

Furthermore, traders should remember that when the trend is sideways, they need to use Moving Averages with large periods.

How Effective Is MA?

Any indicator has its pros as well as cons. And MA isn’t the exception. E.g., it suits trend identification. However, this indicator delays and doesn’t show new information. Still, it’s one of the most used tools among Forex traders.

Nay, dealers may apply Moving Averages during crypto and fiat currency trading. But it works best when the market is in an uptrend or a downtrend. Traders can find more information on this topic in thematic blogs (for example, at fbs.com).