Sunday, August 12, 2007

Moving Averages

A moving average is an average of a predetermined number of prices over a number of days, divided by the number of entries. The higher the number of days in the average, the smoother the line is. A moving average makes it easier to visualize currency activity without daily statistical noise. It is a common tool in technical analysis and is used either by itself or as an

As one can see from Figure , a moving average has a smoother line than the underlying currency. The daily closing price is commonly included in the moving averages. The average may also be based on the midrange level or on a daily average of the high, low, and closing prices.

Figure MA1. Examples of three simple moving averages—5-day (white), 20-day (red) and 60-day (green).

It is important to observe that the moving average is a follower rather than a leader. Its signals occur after the new movement has started, not before.

There are three types of moving averages:
1. The simple moving average or arithmetic mean.
2. The linearly weighted moving average.
3. The exponentially smoothed moving average.

As described, the simple moving average or arithmetic mean is the average of a predetermined number of prices over a number of days, divided by the number of entries.

Traders have the option of using a linearly weighted moving average (See Figure MA2). This type of average assigns more weight to the more recent closings. This is achieved by multiplying the last day's price by one, and each closer day by an increasing consecutive number. In our previous example, the fourth day's price is multiplied by 1, the third by 2, the second by 3, and the last one by 4; then the fourth day's price is deducted. The new sum is divided by 9, which is the sum of its multipliers.

Figure MA2. Example of a 20-day simple moving average (red) as compared to a 20-day

weighted moving average (white)

The most sophisticated moving average available is the exponentially smoothed moving average. (See Figure 5.37.) In addition to assigning different weights to the previous prices, the exponentially smoothed moving average also takes into account the previous price information of the underlying currency.

Figure MA3. Example of a 20-day simple moving average (red) as compared to a 20-day
exponential moving average (white)


Ghazanfar Ali Shah said...

awesome post thank you so much, keep it up.
forex trading

Anonymous said...

I just wish to say one thing. Deleting whole thing isn't good idea even you feel doing it. I say that from position that blogs like yours documenting now 5 years journey are inspiration to starting forex traders. I remember that few years ago when I wasn't forex trading at all but was on demo that I found your blog. It was so interesting that I read through all posts about forex trading. You don't get anything with deleting about forex trading and some others may lose. Let it be win win situation even if you don't post anymore about forex trading

Anonymous said...

Analysis is very important in forex trading, although it is almost never easy to do and usually takes a lot of time. Trading Analysis makes decision making a lot easier and the outcome is usually satisfactory. When start forex trading, analysis is very important because you can’t rely only on the money management strategy to succeed. You can forecast the direction of the market basing on your technical and fundamental strategies to see their effectiveness.

Ricky Smith said...

I admire what you've got accomplished here.

ganar dinero por internet
ganar dinero

Ricky Smith said...

Hi, cool post. I have been thinking about this topic,so thanks for sharing.

forex live trading
swing trading