Today we have a new forex article by Jennifer Gorton from ForexIndicators.net
The currency markets are a highly volatile market which requires traders to be watching positions carefully. Within a period of a few seconds, currencies can move quickly in either direction, driving investors out of their positions. The most popular method used to trade currency markets is by using technical analysis. Technical analysis incorporates the study of the supply and demand that is occurring within any market place. The demand in the particular asset will have an impact on the price investors are willing to pay. The investor can then analyze the price movement to try and predict what direction the market might be headed. Technical indicators are not always 100% accurate and do not provide the investor with the one magic tool to make money. Technical indicators are simply showing the investor the price movement in the past so they can develop a plan for a future position in an asset. There are quite a few technical indicators that are used to trade the currency markets. However, the simplest forms of technical indicators are just a variation of moving averages.
Implementing moving averages into your trading charts is always helpful when trying to determine where the price will head. There a few different types of moving averages, but all try to smooth out the price movement for the investor to interpret. The Simple Moving Average (SMA) is the most basic of the averages that can be used in the charting software that brokers will provide. All the SMA calculates is the asset’s closing price of the last X amount of day. The equation looks something like this: (P1 + P2 + P3 + P4 + … + Px) /X. If you take actual data points and plug them into the equation, you will get a figure that will tell you if the current price is above or below its SMA. Most short term traders will use 10 and 20 day moving averages. The shorter the time frame you use, the closer the average will be to the price it is trading at currently. Longer term trader will use 50 to 200 day moving averages, trying to predict price trend for six months to a year.
The Exponential Moving Average (EMA) is similar to a simple moving average, except that more weight is given to the latest data. The exponential moving average is also known as the exponentially weighted moving average. This type of average reacts faster to recent price changes than a simple moving average. Since the equation gives more weight to the recent prices, the average will move differently than when all data is given equal weight. The most common EMA time frames are the 12 and 26 day for the short term traders. This time frame in the EMA is also used in other technical indicators, including the Moving Average Convergence Divergence. The MACD is a great technical indicator that helps trader spot developing trend and whether the trend is positive or negative. Like with the SMA, the longer the time frame you choose to incorporate, the more rounded the graph will look. Longer term investors should be using the 50 to 200 day EMA to get sufficient data to position themselves for the longer term.
Moving averages can create buy and sell signals for the investor and trader. Most charting software that stock or Forex brokers give their clients have more than enough technical indicators to make your head spin. The Forex indicators that are programmed into the software sometimes won’t be that much help to the trader at all. Moving averages have been the easiest form of technical indicator to help the investor or trader spot a developing trend. These computer charting programs will ask the user to plug in two different time periods to track moving averages. Like I said before, a popular time from for the short term trader is using an EMA is a 12 day and 26 day pair. This will graph the EMA on your stock or currency chart for the past 12 and 26 days. Buy signals are generated when the 12 day EMA crosses over the 26 day and this indicates that the shorter termed average is rising and the possibility of a uptrend might occur. When the 12 day crosses below the 26, then that indicates that the average price is moving lower and that the trend might be going lower in the short term. When using moving averages to generate buy and sell signals, be sure you have other indicators that will help to confirm the trade signals generated by moving average crosses.