Moving averages are one of the most popular technical analysis tools used by forex traders to identify trends in the market. It is a simple yet powerful tool that can help traders to determine the direction of the market and make informed trading decisions. In this article, we will explain how to use moving averages in forex pdf.
What is Moving Average?
Moving Average is a widely used technical analysis tool that helps traders to identify the trend direction in the forex market. It is a simple arithmetic average of the closing price of a currency pair over a specific period of time. The moving average is calculated by adding the closing price of a currency pair for a specific period and dividing it by the number of periods.
There are two types of moving averages used in forex trading – Simple Moving Average (SMA) and Exponential Moving Average (EMA).
Simple Moving Average (SMA)
Simple Moving Average is the most commonly used moving average in forex trading. It is calculated by adding the closing price of a currency pair for a specific period and dividing it by the number of periods. The result is a smooth line that reflects the average price of a currency pair over a specific period of time.
For example, if you want to calculate the 20-day simple moving average of the EUR/USD currency pair, you need to add the closing price of the currency pair for the last 20 days and divide it by 20. This will give you the 20-day simple moving average of the EUR/USD currency pair.
The formula to calculate SMA is:
SMA = (Closing Price1 + Closing Price2 + … + Closing Price n) / n
where n is the number of periods.
Exponential Moving Average (EMA)
Exponential Moving Average is another type of moving average used in forex trading. It gives more weight to the recent price data than the older price data. This means that the EMA is more responsive to the current market conditions than the SMA.
The formula to calculate EMA is:
EMA = (Closing Price – EMA(previous day)) x Multiplier + EMA(previous day)
where Multiplier = (2 / (n + 1))
n is the number of periods.
How to use Moving Average in Forex Trading?
Moving averages are used in forex trading to identify the trend direction of the market. Traders use moving averages to identify whether the market is in an uptrend or a downtrend.
If the price of a currency pair is trading above the moving average, it is considered to be in an uptrend. On the other hand, if the price of a currency pair is trading below the moving average, it is considered to be in a downtrend.
Moving averages can also be used to identify support and resistance levels in the market. If the price of a currency pair is trading near the moving average, it is considered to be a support level. On the other hand, if the price of a currency pair is trading away from the moving average, it is considered to be a resistance level.
Traders can also use moving averages to identify potential entry and exit points in the market. For example, if the price of a currency pair is trading above the moving average, traders may consider buying the currency pair. Similarly, if the price of a currency pair is trading below the moving average, traders may consider selling the currency pair.
Conclusion
Moving averages are an important tool in forex trading. They help traders to identify the trend direction of the market, support and resistance levels, and potential entry and exit points. Traders can use both simple moving averages and exponential moving averages to make informed trading decisions. However, it is important to note that moving averages should be used in conjunction with other technical analysis tools for better accuracy.
