Forex Moving Average

A moving average (MA) is an average calculated continuously over a specified period of time. Moving means calculating a new value each time frame advances so that our average value adjusts as the price changes. If we use a 50-day moving average, the value is the average of the previous 50 days of price. In other words, we add up each of the last 50 closing prices and then divide the total by 50. The value is recalculated daily, discarding the oldest value in the data set and adding the most recent day of occurrence. Therefore, moving averages smooth out price fluctuations and can be used to help us identify market trends. They can be used with other moving averages or other technical indicators covering different time periods to build a moving average trading strategy.

Types of Moving Averages

• Simple Moving Average: Its value is the simple arithmetic average of price changes.

• Exponential Moving Average: Here more weight is given to the latest data. Weights are calculated as arithmetic progressions.

• Linear Weighted Moving Average: Gives more weight to the latest data, but the weight is calculated exponentially.

• Smoothed Moving Average: gives more weight to the latest data, it takes into account price values outside the time period (their impact is not significant).

How to Use Moving Averages for Forex Trading?

Moving Average Crossover Strategy

This is a simple moving average strategy that gives you trading signals when the faster moving average crosses the slower moving average. This moving average trading strategy always allows you to take a position in the market, whether it is long or short. When the faster MA moves back below the slower MA, it will be a signal to close the position. At this point you would square the sum of the reversals and go short on the market. 

Triple Moving Average Strategy

As the name suggests, this moving average strategy uses three MAs: one fast, one medium, and one slow. Trading signals are generated when the fastest moving average crosses the medium and long-term averages, just like the dual strategy. However, there is an additional rule to consider - the slowest moving average acts as a trend filter. This means you can only trade when the two faster MAs are on the correct side of the filter line. In order to go long, both need to be higher. To go short, both need to move lower.

Moving Average Band Strategy

A moving average band is a collection of MAs with various different time periods on the same chart. The result of these multiple MAs creates a ribbon-like effect, hence the name. The length of the MA varies from short to long term, and the resulting banding effect provides an indication of the direction of the trend and its strength. When the MAs are parallel and evenly spaced, it means the current trend is strong. Expansion between the bands indicates a possible end to the current trend, while contraction of the bands signals the beginning of a new trend. Like the previous strategy, buy and sell signals are represented by crossovers. However, due to the number of MAs and therefore crossovers involved, traders must decide for themselves how many crossovers represent appropriate trading signals for their Moving Average Band strategy.

Why Use Moving Averages for Forex Trading?

Moving averages are popular among Forex traders because of the indicator's ability to organize data over a specific time period into a "bird's eye view" that can identify patterns and trends. Arguably, the most important part of successful Forex trading is being able to anticipate where the market is going, and this is where moving averages can come into play. By finding the market's average price and observing how it changes over time, Forex traders can better predict their next move.

Another benefit of the Moving Average indicator is that if you want to calculate it manually, it is relatively easy to do compared to some of the Forex trading mathematical formulas. This is because it is simply an average of market prices over a period of time. This also makes it fully customizable, so you can calculate a moving average for any time period or for any market.

What Is the Best Moving Average Trading Strategy?

So what are the best moving average strategies for Forex trading? There is no one-size-fits-all answer to this, as the most suitable trading strategy will depend on the preferences of the individual trader. One way to help you decide what works best for you is to backtest your strategy. It's a similar story when it comes to choosing an appropriate time frame for your average. If you are dealing with shorter time frames, you will need to deal with a proper fast moving indicator.

So, if you trade using a day trading moving average strategy, then it might make sense for you to use a 30 period moving average on a 15 minute chart. If you are a long-term trend follower, you may find that just the 350-day moving average is suitable. Someone looking to swing trade a moving average strategy will probably use some time frame in between.

A useful way to decide which settings work best for your strategy is to experiment with a demo trading account. This will allow you to fine-tune your system without taking unnecessary risks while you're still operating in a trial-and-error mode.