Forex trading is becoming a more extended and desired occupation for many people around the world with the desire of working at home and still having the ability to gain a good full time income.
Among the important concepts a new forex trader should know is what a Moving Average means, how this indicator is calculated and its use as a trading tool.
A “Moving Average” is a technical indicator that shows the average value of a particular currency pair over a previously determined period of time. This means, for example, that prices may be averaged over 20 or 50 days, or 10 and 50 min depending on the time frame that is more convenient for you at the moment of your trading activity.
Moving Averages are an averaged quantity and can bee seen as a smoothed representation of the market activity at the moment and it’s an indicator of the major trend influencing the market behavior.
This smoothing effect of the Moving Average is very helpful when the trader is looking for getting rid of the “noise” in the price fluctuations of the currency pair he is trading at the moment and a more precise emphasis in the trend direction is required.
The mechanics of how Moving Averages can tell a forex trader where the forex market is moving (up or down) is by considering two different time frame Moving Averages and then plotting them on a forex chart. It is very important that one of these MA is over a shorter time period than the other one; let’s say one will be over a 15 days period and the other over a 50 days period.
Once you have plotted the two Moving Averages with your charting software (available from most internet forex brokers), you will notice points of crossover where the shorter time period MA will cross above the longer time period MA indicating an upward trend in the market, or if the crossing is below the longer period MA that will be an indication of a down trend in the forex market.
So by using this simple concept of the Moving Averages you can start understanding the basics of confirming trends when checking your forex charts during your particular trading hours.
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Written By: Adrian Pablo
