The Moving Average indicator optimal for forex one of the most basic Forex technical analysis tools. It is an on-chart lagging line, which smooths the price action. The reason for the lag is that the Moving Average averages a certain number of periods on the chart.
The basic function of the Moving Average is to provide the trader with a sense of overall trend direction, but is can also provide signals for upcoming price moves. In addition, the Moving Average line can act as an important support and resistance area. The reason for this is that price action tends to conform to certain psychological levels on the chart. Every Moving Average is subject to a calculation, which gives an output that can be plotted on the price chart.
This means that each period on the SMA will give you an average of the 5 previous periods on the chart. USD starts increasing, the SMA will start increasing 5 periods later. In regards to that, a Moving Average could be set to whatever period you want. Notice that the red 20-period SMA is slower than the blue 5-period SMA.
It is smoother and it does not react to small price fluctuations. The reason for this is that the 20-periods SMA takes more periods into account. In this manner, if we have a rapid price change which lasts for one period, and then the price gets back to normal, the other 19 periods will neutralize this fluctuation. Let’s say the price stays at 1. On the eleventh period, the price reaches 1. Then during the next 9 periods the price returns and stays at 1. What will the 20-period SMA show?
Now let’s say the price starts at 1. Then during the second period the price reaches 1. Then for the next three periods the price returns and stays at 1. What will our 5-period SMA show? So, in the first case we have a 1.
5025 value, which barely differentiates from the basic 1. In the second case we have a 1. 5100 value, which is 75 pips more. So in essence, the bigger SMAs react smooth price better and react less to price individual bar fluctuations. There are different types of Moving Averages depending on how they are calculated.
For example, Some of the Moving Average lines weigh recent price action more heavily than past price action, others treat all price action the same for the entire period. It just gives an arithmetic mean of the periods on the chart. Moving Average, which Forex traders frequently use. It looks the same as the Simple Moving Average on the chart. However, the EMA calculation differs from the SMA calculation.