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Moving Average


Moving averages are one of the most popular and easy to use tools available to the technical analyst. Moving average Forex indicator is the average price for a given time interval in relation to other prices during the similar time periods. For instance the closing prices over a 5-day period would have a moving average of the total of the five closing prices divided by five.

 

The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).

 

A Simple moving average is calculated by adding the prices over a given number of periods, then dividing the sum by the number of periods. For example, a nine-day simple moving average would add together the closing prices for the last nine days, and then divide that number by nine.

 

An Exponential moving average gives more weight to recent prices, and is calculated by applying a percentage of today's closing price to yesterday's moving average. The longer the period of the exponential moving average, the less total weight is applied to the most recent price. The advantage to an exponential average is its ability to pick up on price changes more quickly.


How to use?

 

If the price rises above the moving average it can be considered a bullish signal, and if the price dips below the moving average, it can be considered a bearish signal. This "crossover" or "penetration" will not be at the top or bottom, but normally shortly after the price bottoms out or tops out.

Longer-term and shorter-term moving averages can be compared to each other, and generate signals when they cross. When a shorter term MA moves across a longer term MA and both slopes go up, it can be considered a bullish signal. When a shorter term MA moves across a longer term MA and both slopes go down, it's can be considered a bearish signal.

 

An Example of using Longer-term and shorter-term moving averages to generate signals.

 

You can use this technique for any currency at 1H or 1 Day time frame. We have to use 7 SMA (Green Line), 14 SMA (Red Line), and 21 SMA (Blue Line).

 

Entry Rules for Short: Sell when 7 SMA (Green Line) goes through 14 SMA (Red Line) and continues through 21 SMA (Blue Line) in downward direction.

 

Entry Rules for Long: BUY when 7 SMA (Green Line) goes through 14 SMA (Red Line) and continues through 21 SMA (Blue Line) in upward direction.

 

Exit rules: Exit when 7 SMA (Green Line) goes back and touches 21 SMA (Blue Line).

 

moving average forex chart

 

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Average Directional Movement Index

Moving Average Convergence/Divergence (MACD)

Stochastic Oscillator

Relative Strength Indicator (RSI)

Moving Average

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