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Why Is Moving Average Important?

The most experienced Forex traders will tell you that understanding the moving average concepts is the route to succeeding in forex trading.

The knowledge of moving average is crucial because moving average forms the fundamentals of technical analysis. Most (if not all) technical indicators build on moving average.

This magnetizes the question: what is so special about moving average? This article defines, describes types, calculations of a simple moving average. Read on to find out more.

What Is Moving Average?

Moving Average, as a technical indicator, helps you forecast price by calculating and analyzing past data— when grouped into various data points.

You can take two routes to calculate the moving average depending on the moving average you focus on. The types of moving averages are simple moving average and exponential moving average.

Here is an example of the moving average in action.

Assume you want to calculate a currency pair’s moving average for various weeks in a month. Let’s take you are analyzing the lowest daily prices of the USDJPY for the four weeks. The first week’s readings are 104.57, 104.59, 104.42, 105.33, 105.29.

You can calculate the week’s moving average by following these steps:

Step 1: Total the readings

104.57 + 104.59 + 104.42 + 105.33 + 105.29 = 524.2

Step 2: Get the average

Average = total divide by the number of days.

The total is 524.2, while the counts are five days. Therefore, the average is 104.84. This becomes the simple moving average for the week.

Simply put, moving averages imply that the previous averages do not influence the current calculations.

And here is the more exciting part. Why is the calculation called ‘moving’ average? Here is simple math to further illustrate the concept of moving average:

Let’s assume you proceed to get the second week’s average. Say the week’s values are 105.55, 105.38, 105.95, 106.39 and 106.88. The week’s averages will be (105.55 + 105.38 + 105.95 + 106.39 + 106.88) / 5, which results in 530.15/5 = 106.03.

Let’s compare the two weeks’ calculations.

The first week’s average is 104.84, while that of the second week is 106.03. The average differs per week, although the calculation focuses on the same currency pair data. This is the motivation behind the ‘moving’ average.

The average is calculated on a dynamic price. The forex currency pair’s price keeps changing. So, the average keeps updating to give a reliable picture of the market.

You can determine the price alterations by focusing on either the price’s highest or lowest daily recordings.

“Can I know the moving average if I’m poor in Mathematics?” You may ask.

Yes, you can know the moving average without manual calculation. The advancement in technology has made the calculation of both SMA and EMA automatic. The most typical charting packages will calculate the moving average for you.

Now that you understand how moving average works let us jump into the advantages of moving averages.

Importance of Moving Average

Determine and Exploit the Trend

Moving averages focus on past data. The statistics mostly gather data over 10, 20, or 100 days. You can view the fall and rise of a particular currency pair price.

You can determine the price trend from the various weekly, month, or annual averages. The trend can help you choose the probability of prices rising or falling anytime soon.

Besides, it shields you from the effects of noise trading since you make data-driven forex trading decisions.

Adjust and Create Different Strategies

Moving averages enable you to track market changes and create a strategy that works the best. For instance, you may generate a short-term plan by calculating the average over a short time.

A five-day average is more reactive to sight changes than one on long-term accumulated data moving average. You can always change your strategy by deciding on the price interval you want to analyze.

Conclusion

The moving average enables you to grasp forex trading analysis basics—the information on moving average pioneers your understanding and application of other technical indicators.

The route to understanding moving averages is to find out what, where, when, how, and why you need it, as explained in this article.

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