The moving average indicator

A good technical analysis is the base of successful Forex trading sessions. One of the oldest and most used indicators in the technical analysis in Forex is the moving average. The average is applied to the last periods of time and signals or helps identify a new trend or changes in the existing trend. There are more types of moving averages but the most popular are simple, exponential, triangular and weighted.

As its name suggests the simple moving average indicator is an average applied to a moving body of data. As example, a ten days moving average is calculated as a sum of the closing prices of the last ten days and divided by ten, the number of the periods. The average is then moved forward every trading day. The indicator has sensitivity but the longer the period the weaker the sensitivity is. If the period is short the risk of false signals is higher and the moving average is more influenced by every day shifting.

 The exponential moving average is calculated by adding the current price multiplied by a weight (a) to the previous moving average multiplied by 1-a. The weight decreases exponentially so recent prices having more importance than older values. For example if the actual value has a 25% weight means that to get the actual moving average you sum up 25 % of the actual value to 75% of the previous moving average. To determine the percentage corresponding to the previous values is used the following formula: 2/ (period+1). Using a period of 9, for example, will result in a 20% weight for the actual value and 80% for the previous exponential moving average value. The 12 days and 26 days exponential moving averages are the most popular shot-term averages.

Triangular moving average indicator is calculated as a simple arithmetic average of the simple arithmetic average of prices. The triangular moving average has a smoothing effect by averaging the average.

The weighted moving average is calculated by averaging the previous values of the period giving them linear weight. This means that the first and in the same time the oldest value gets a weight of 1, the second a weight of 2 and so on to the actual value that gets the weight equal to the period. In this type of moving average the recent values of price data have higher weight. After the closing prices of every day are multiplied by their weight, there are summed and divided to the sum of weight (1+2+3+….until the end of the period).

These are just few and most popular moving averages indicators used in Forex technical analysis to identify the trend.