Moving averages are perhaps the simplest and most popular indicator in the forex market. In technical analysis, many indicators established on the basis of moving averages.
This indicator is considered to be the type of "trend-following" indicators that can be used to determine the start of a new trend, and its completion. On the corner of the moving average can be determined by the price movement. In this paper, we consider a simple moving average, or Simple Moving Average, which is often called a trend line.
In this case, a simple moving average with a period of five (Simple MA (5)) is equal to the last five opening prices (P1, P2 ...) by dividing by five. Quite simply, the indicator is the average rate of the last five with the opening prices.
To count can be taken any price: closing, opening, minimum, maximum ... It does not matter, but yet most traders use the open or closed. Also be taken into account in the calculation of the moving average and period - in the example we have considered the Simple MA 5-period, and if the period of 8, you should take the price and divide 8 by 8 too.
As you can see, the simple moving average is the arithmetic average price over a specified period. From an economic perspective, it is a balance between supply and demand for the period.
The smaller the period, moving average (say the short moving average), the faster it will determine the availability of a new trend, but it will give more false signals. If you specify a longer period, the average will produce fewer false alarms, but it was missing most of the weak market movements.
Using a simple moving average:
Since this indicator is to monitor the trend, it should be used only when a trending market conditions. Also, a simple moving average does not give signals at the entrance to the market, and only points to the emergence of a new trend. If there is no trend moves all moving averages, including a simple, become completely ineffective. Still, they are quite often used by traders. Here are the main methods to use Simple Moving Average:
1. Calculating direction of price movement. If the indicator is towards the top, you should only enter orders to purchase, and if down, only to sell. To determine the points well received in the market, use signals from other indicators.
2. Spread simple moving average can be regarded as the end of the current trend and the beginning of a new one.
3. Crossing price chart its moving average upward generates a buy signal, and also at the intersection of the top down, but it is a signal to sell.
4. Sometimes simple moving averages with rounded periods (50, 100, 200) is considered as support and resistance levels.
5. Depending on the direction indicator, you can determine the direction of the trend, and depending on the period of the moving average which currently trend (long-term, short-term).
With the market trending better use of the short moving average and a longer flat (with a period of more than 20). So you will save on many false signals.
Disadvantages simple moving average:
At the beginning of a strong indicator of the trend movement long overdue, and it leads to a partial loss of potential profit.
With flat (sideways market) simple moving average gives a lot of false signals to enter the market, and this can lead to severe loss of money. Conclusion - do not use moving average for flat.
The simple moving average is the most simple and the same time an effective indicator. It lies at the basis of many indicators, and can be a basis for predicting future price movements.