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Moving Averages in Forex Trading
What are Moving Averages?
Moving averages clarify the direction of the underlying trend by smoothing out price fluctuations. This is done by taking the average of the closing prices seen during a fixed period of recent price action. For example, a 50-day simple moving average will sum up the closing prices for the last 50 days and divide this total by 50. The averages are called moving because they calculate a new average with each price bar. For the 50-day simple moving average each day the new close will be added to the total and the close fifty one days back will be subtracted from it. Popular moving averages used in forex trading are 5-day (a week of price data), 20-day (around one month of price data), 50-day, 100-day and 200-day moving averages. The shorter the time period of the moving average the quicker it reacts to changes in trend direction. The longer the moving average the greater it’s smoothing effect, resulting in fewer whipsaws (false signals). Similarly to trendlines the slope of a moving average displays the strength of the current trend. Moving averages are sometimes referred to as automated trendlines.
What are Moving Averages?
Moving averages clarify the direction of the underlying trend by smoothing out price fluctuations. This is done by taking the average of the closing prices seen during a fixed period of recent price action. For example, a 50-day simple moving average will sum up the closing prices for the last 50 days and divide this total by 50. The averages are called moving because they calculate a new average with each price bar. For the 50-day simple moving average each day the new close will be added to the total and the close fifty one days back will be subtracted from it. Popular moving averages used in forex trading are 5-day (a week of price data), 20-day (around one month of price data), 50-day, 100-day and 200-day moving averages. The shorter the time period of the moving average the quicker it reacts to changes in trend direction. The longer the moving average the greater it’s smoothing effect, resulting in fewer whipsaws (false signals). Similarly to trendlines the slope of a moving average displays the strength of the current trend. Moving averages are sometimes referred to as automated trendlines.
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