Whether you’re a novice, intermediate, or advanced trader, chances are, you’re already familiar with Moving Averages. It’s no surprise since betting your odds in the foreign exchange market with them is rather effortless; using them reveals versatility and freedom from a series of challenging computations. With them, the first step is to keep your knowledge on technical analysis (i.e. be ready to read charts like a pro) handy.
# 1 – Moving Averages have a variety of flavors. The list includes: (1) Exponential Moving Averages, or averages of the previous prices in relation to the current prices, (2) Simple Moving Averages, or averages of the previous prices, and (3) Weighted Moving Averages, or averages of the previous prices in relation to linear weighting.
# 2 – Moving Averages are responsive. In the event of an immediate change in market trends, they tend to be influenced easily. They’re extra-sensitive and have a history of signaling premature entry or exit in a trade.
# 3 – Moving Averages are known to smooth market trends. For correct assessment, paying attention to their direction is the key. If they point upward, they’re indicating a bullish trend. Conversely, if they point downward, a bearish trend is incoming.
# 4 – Moving Averages indicate price exhaustion and market strength. If there’s a change in price on one side, steep lines are produced. Therefore, if they’re moving in a flat line, it’s a sign of a dormant market.
# 5 – Moving Averages serve as support and resistance levels. If a price bar is spotted, it’s useful to observe their interaction with the current prices. In the event that movement is rapid, it’s unlikely to identify support and resistance levels. Conversely, if it’s quite slow, it’s a sign that support and resistance levels will soon be identified.
# 6 – Moving Averages can lag; a mistake of beginner forex traders is the assumption of their stability. Since they are lagging indicators, it’s common for them to show a reaction once the prices have moved. Therefore, it’s recommended that they’re used with price action indicators.
# 7 – Moving Averages are known to maintain a familiar distance between prices. Typically, this is seen in three instances: (1) a fair distance is maintained below in a healthy bearish market, and above in a healthy bullish market, (2) a short gap is maintained in sideways markets, and (3) a grand distance is maintained in over-extended trends.
Content references: https://en.wikipedia.org/wiki/Moving_average , http://www.mtrading.in/education/knowledge-base/