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Posted on Aug 25, 2015 at 08:59 PM
Determine the best opening and closing position of a trade with the Moving Average technical indicator
The moving average is a technical indicator that allows us to get a notion of the current trend and define the effective opening and closing position points of a trade.
This type of indicator is depicted as a curve on the price chart. Its main task is to filter price changes, in order to show the major price tendencies for a currency pair.
The primary benefit of using the Moving Average is to reduce market noise that makes it difficult to accurately interpret real time exchange rate data. Moving averages "smooth out" these noise or fluctuations, making it easier for you to identify and authenticate potential market rates from the normal volatilities common to currency pairs.
The two basic types of Moving Average are: simple moving average and exponential moving average. The major difference of use is that the Simple Moving Average curves are applied for the long-term trade while the Exponential Moving Average is applied for short-term trades.
Simple Moving Average (SMA): This is the simplest form of the Moving Average Indicator. It is represented by a curve in the pie chart, and its main task is to filter price changes.
To understand SMA curves, it is important to realize the principle of its plotting. For a certain time point along the x-axis in the process of construction, a number of recent points are taken into account, depending on the chosen smoothing co-efficient.
SMA curves are efficient, when a particular trend has formed on the market. However, one important drawback of this indicator is that all the prices composing it are of the same weight. It would be more logical to give more weight to the recent prices and less weight to the long-standing prices.
Exponential Moving Average (EMA): This can be considered as weighted Moving Average whoose weights are decreasing exponentially with the remoteness of the trading period taken for calculation, starting from the current one. Such distribution makes it possible to concentrate on the current prices in the process of analysis and not to omit the important trading signals. The EMA reduces the lag, giving more significance to the newest prices compared to the older prices. This makes it possible to react more quickly to the current price variation as opposed to the Simple Moving Average. The EMA curves are often exploited during the short-term trade, as they allow a trader determine quick price changes on the currency market.