Moving averages are the essence of the forex market traders. These “trade foreign currency” tools help traders examine different currencies based on past performances.
There are two types of tools – Technical and fundamental tools. You can read about them here.
It is a reliable technical tool which generates trader signal for market users. These two types of MAs, i.e. simple average and exponential average.
Here, we are discussing the advantages and disadvantages of using this tool. The pros and cons are categorized as per moving average types. However, before moving to the benefits, let’s get through a little bit of understanding moving average.
Moving Average: Overview
A moving average is taking an average of past price records of any online forex trading financial instruments. It works in time frames.
For instance, if you will calculate a 20-day moving average, then it is doing nothing but taking a proportion of the past 20 days.
The most usually available time frames are 10, 20, 50, 100, and 200. Moreover, there are different forex trading period too, i.e. whether you want to take prices of every hour, minute, day, week, or month.
The period, which a trader chooses, plays a significant role in calculating the moving average and the desired result. In the trader’s language, it is known as a “lookback period.”
Now, let us move to the advantages of using a moving average or MA.
Simple Moving Average:
- 1. It is not a sophisticated technical analysis tool, i.e. pretty easy.
- 2. Not affected by ups and downs of an asset’s price, i.e. prone to fluctuations.
- 3. A brilliant tool for identifying the support and resistance points, i.e. a reliable tool.
- 4. Beginner traders can start base trade upon it too.
- 5. Aids and removed short term noises from the chart.
Exponential Moving Average
- 1. It provides a more unobstructed view of the trends than SMAs.
- 2. Acknowledges recent price changes and thus, is more effective.
- 3. Very helpful for short-term and day traders, as the recent highs and lows play a role in it.
- 4. The exponential moving average will analyze the price movements thoroughly. Whether the trend is reversing, losing its track, or is still in motion.
- 5. Much easier than other technical tools.
Simple Moving Average:
- 1. It doesn’t acknowledge recent price changes. It gives equal emphasis to each price taken.
- 2. Not practical for users, trading for short term or intraday traders.
- 3. Allots equal weightage to every price point.
Exponential Moving Average:
- 1. More affected by recently created “false” price fluctuation, and thus, gives wrong signals to traders.
- 2. It requires observing a lot of previous price points.
Moving average makes observing trends easier for a trader, especially for newbies. It made this tool quite famous. But, it would not be a good idea to use this tool on every asset. Every asset requires a different kind of analyzer. What works for a commodity product might not work for another.
Moreover, the time frame should be chosen with care. A little change in time frame can change the results thoroughly. Therefore, we always recommend potential and beginner traders to first do their homework and then start investing or analyzing.