Moving average is the average rate of a currency pair over a set period.
For example, if you conduct a 20-day moving average (20 day MA), you
simply add the close price of the past 20 days and divide it by 20. This
is called a simple moving average (SMA).
There are few varieties of the moving averages. The most common ones
are: Simple Moving Average (SMA), Exponential Moving Average (EMA) and
Linearly Weighted Moving Average (WMA). EMA and WMA are under the moving
average family that they put more weight on recent data in
calculations. They react faster than SMA to the current price movement.
As shown on the chart below, 10 WMA is more sensitive to the current
price movement than the 10 SMA.
How to use Moving Average: Direction of the Trend
Traders can recognize the direction of the trend with reference to the
direction of the trend line and their order of arrangement.
How to use Moving Average: Support and Resistance
The moving averages can act as support and resistance lines. In an up-trend, the SMAs below the rising price can act as support levels. If there is a retracement, the price is likely to bounce off the moving averages. It is the same for a downtrend movement, that the SMAs above the falling price can act as resistance levels.
How to use Moving Average: Crossovers Signals
Whenever a shorter-term moving average crosses over a longer-term one, it indicates that there is a momentum shift. Traders can use this opportunity to enter a trade in the direction of the crossover.
