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Forex Trading Moving Averages

When you are trying to handle accurate forex signal trading, one of the most useful tools you can use is the moving average indicator. In this section we will see how to calculate Forex moving averages and use it in the online Forex trading market. Because the Forex trading market is a spot market, moving averages are used to calculate the current average of prices, and can help traders make investments on the spot.

Simple moving average

A Forex average is the summation of prices divided by the number of prices. Let's say you are calculating the average of prices for the last four days, which is calculated from the numbers 100, 102, 104 and 106. The average for these numbers is 103. If on the fifth day the price is 105, then you drop the first number (100) and add the 104 to the average. So the new average is made of 102, 104, 106 and 105. The average we just described "moved" from being 103 to 104.25. This is what we call Forex moving averages.

A simple moving average (SMA) is the unweighted mean of the previous n data points. If those prices are p1 to pn then the formula is: SMA = (P1+P2+P3+...+Pn)/n

To calculate a new average, you can use this formula:

current SMA = Previous SMA - P1/n + P(n+1)/n.

Weighted moving average

A weighted average gives different weights to different data points, so some points are given a larger emphasis than others. In technical analysis, the weights placed on different data point decrease in value, so the latest day gets the largest weight, and the weight decreases as the data is earlier. If we are looking at a timeframe of n days, the latest day will get a weight of n, the second latest will get n-1, and so on, until the earliest day gets the lowest weight.

The equation for the WMA is:

WMA= nP1+(n+1)P2+…+2P(n-1)+Pn / n+(n-1)+…+2+1

Exponential moving average (EMA)

An exponential moving average (EMA), also has decreasing weights for data points, but the decrease is done exponentially. Each day the weighting decreases by a percentage of the previous decrease.

Sam Davis - Executive Editor
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