The blue line is a 5-period SMA, which takes into consideration 5 periods on the chart to show a value.

The red line is a period SMA, which takes into consideration 20 periods from the chart to show a value. It is smoother and it does not react to small price fluctuations. The reason for this is that the 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.

See the calculation below:. On the eleventh period, the price reaches 1.

Then during the next 9 periods the price returns and stays at 1. What will the period SMA show? Then during the second period the price reaches 1.

Moving Average – Definition

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. In the second case we have a 1. 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. It looks the same as the Simple Moving Average on the chart. The reason for this is that the EMA puts more emphasis on the more recent periods. Now we have to calculate the multiplier. This concerns another formula:. We will first calculate the multiplier. We will now calculate the current EMA. However, we will need a previous EMA value. We apply the values we have in the formula:. The multiplier we calculated determines the emphasis put on the recent periods. In this manner, the more the periods there are, the less the emphasis will be, because it will embrace more periods.

Now look at the black ellipse and the black arrow on the chart. Notice that the candles in the ellipse are big and bullish, indicating a strong price increase. The difference is that the VWMA puts emphasis on the periods with higher volume.

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• Calculating The SMA.
• How To Use Moving Averages – Moving Average Trading 101.

This is how a 5-period VWMA is being calculated:. So, the higher the volume of a period, the more the emphasis will be on this period. Have a look at the image below. We have two Moving Averages on the chart. In the black ellipse we see a rapid price increase. The Moving Average indictors can help us to identify the beginning and the end of a trend. We will also discuss some of the limitations that all traders should consider before adopting moving averages into their trading strategy.

The exponential moving average on the other hand gives greater weight to more recent price action. The moving averages that we will be looking at in this lesson are the 10 and 20 exponential moving averages. I prefer exponential over simple as I feel it gives a better indication of what is happening rather than what has happened. There are many ways in which to use moving averages, but the three methods below are my personal favorite.

One thing to keep in mind as we move through the lesson, is that a moving average or moving average combination should never be used alone. Because it is a lagging indicator, the moving average should always be used in combination with other price action patterns and signals to help put the odds in your favor. The use of moving averages for trend analysis is arguably the most common use of the indicator. There are many variations of moving averages that a trader may use to analyze a trend, but my favorite combination is the 10 EMA and 20 EMA.

Nor is it something you want to rely on by itself. However when used properly, these two moving averages can make identifying a trend much easier. On the flip side, when the 10 EMA is below the 20 EMA, we only want to be looking for selling opportunities as this often represents a downtrend.

These two moving averages can also be used as dynamic support and resistance. There are several moving averages which carry more weight than others in the market, and the 10 and 20 period moving averages are among them. For example, a currency pair could follow an uptrend, or period of rising values, during a time frame.

Most investors seek to identify these trends and then try to profit from them. Alternatively, a security may do the opposite and follow a downtrend over a period. When an investment behaves this way, it can create losses for any people or institutions owning it.

However, investors should keep in mind that whether a security is rising or falling in value, there are many different ways they can try to generate returns from either its rise or descent. For example, as long as assets are climbing in value, investors can simply buy them and obtain profits. They can also generate returns from depreciating securities through strategies such as shorting. It is worth noting that forex traders with different preferences may employ moving averages of varying length.

For example, someone looking to invest over the long term may look at how a security performs over a time frame such as trading days, as this will grant insight into how the financial instrument has performed in the long run. Alternatively, an individual focusing on short-term trading might hone in on how a currency pair did during a day window, as doing so will provide a sense of how the pair performed in this comparatively short time. One more use of moving averages is measuring the momentum of a given security's price, or how quickly it is either ascending or descending.

The whole point of determining momentum is that once an asset starts moving in a certain direction, it will likely keep going the exact same way. If a forex trader can identify the momentum of a security, he can buy or sell the asset, or even take out long or short positions on it. To single out this momentum, an investor can look at what the financial instrument did within the short, medium or long-term.

If he instead desired a better sense of the pair's long-term momentum, he could look at a measure that used a period of days or more. One more benefit of moving averages is that they can be used to determine an asset's support and resistance.

What Is A Moving Average?

Securities will often find support at important moving averages. Many forex traders will expect securities to find support once they reach key averages and use other indicators in order to back up their forecast. In addition, these same investors will frequently make use of important averages to predict when currency pairs will run into resistance during their upward climbs.