Preschool>= Lesson Status ?
Kindergarten>= Lesson Status ?
Elementary>= Lesson Status ?
Grade 1 Support and Resistance Levels
Grade 2 Japanese Candlesticks
Grade 3 Fibonacci
Grade 4 Moving Averages
Grade 5 Common Chart Indicators
Middle School>= Lesson Status ?
Grade 7 Important Chart Patterns
Grade 8 Pivot Points
Summer School>= Lesson Status ?
High School>= Lesson Status ?
Grade 9 Trading Divergences
Grade 10 Market Environment
Grade 11 Trading Breakouts and Fakeouts
Grade 12 Fundamental Analysis
Grade 13 Currency Crosses
- What is a Currency Cross Pair?
- Crosses Present More Trading Opportunities
- Cleaner Trends and Ranges
- Taking Advantage of Interest Rate Differential
- Obscure Crosses
- Planning Around News and Fundamentals
- Creating Synthetic Pairs
- Euro and Yen Crosses
- How to Use Crosses to Trade the Majors
- How Cross Currency Pairs Affect Dollar Pairs
- Summary: Currency Crosses
Grade 14 Multiple Time Frame Analysis
Undergraduate>= Lesson Status ?
- Why Keep a Trade Journal?
- Benefits of Keeping a Journal
- What Should You Record in Your Journal?
- Potential Trading Area
- Entry Trigger
- Position Sizing
- Trade Management Rules
- Trade Retrospective
- Trading Journal Statistics
- Reviewing Your Trading Journal
- Difficulties of Keeping a Trade Journal
- Summary: Keeping a Trade Journal
Graduation>= Lesson Status ?
- Which Trading Style is Best for You?
- Which Currencies Should You Trade?
- What is Your Level of Trading Experience?
- Should You Be a Discretionary, Mechanical, or Hybrid Trader?
- What Kind of Mechanical System Suits Your Personality?
- What is Your Attitude Towards Risk?
- What Kind of Stop Suits Your Trading Style?
Simple Moving Averages
A simple moving average is the simplest type of moving average (DUH!). Basically, a simple moving average is calculated by adding up the last "X" period's closing prices and then dividing that number by X.
Don't worry, we'll make it crystal clear.
If you plotted a 5 period simple moving average on a 1-hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5. Voila! You have the average closing price over the last five hours! String those average prices together and you get a moving average!
If you were to plot a 5-period simple moving average on a 10-minute chart, you would add up the closing prices of the last 50 minutes and then divide that number by 5.
If you were to plot a 5 period simple moving average on a 30 minute chart, you would add up the closing prices of the last 150 minutes and then divide that number by 5.
If you were to plot the 5 period simple moving average on the 4 hr. chart... Okay, okay, we know, we know. You get the picture!
Most charting packages will do all the calculations for you. The reason we just bored you (yawn!) with a "how to" on calculating simple moving averages is because it's important to understand so that you know how to edit and tweak the indicator.
Understanding how an indicator works means you can adjust and create different strategies as the market environment changes.
Now, just like almost any other indicator out there, moving averages operate with a delay. Because you are taking the averages of past price history, you are really only seeing the general path of the recent past and the general direction of "future" short term price action.
Disclaimer: Moving averages will not turn you into Ms. Cleo the psychic!
Here is an example of how moving averages smooth out the price action.
On chart above, we've plotted three different SMAs on the 1-hour chart of USD/CHF. As you can see, the longer the SMA period is, the more it lags behind the price.
Notice how the 62 SMA is farther away from the current price than the 30 and 5 SMAs.
This is because the 62 SMA adds up the closing prices of the last 62 periods and divides it by 62. The longer period you use for the SMA, the slower it is to react to the price movement.
The SMAs in this chart show you the overall sentiment of the market at this point in time. Here, we can see that the pair is trending.
Instead of just looking at the current price of the market, the moving averages give us a broader view, and we can now gauge the general direction of its future price. With the use of SMAs, we can tell whether a pair is trending up, trending down, or just ranging.
There is one problem with the simple moving average and it's that they are susceptible to spikes. When this happens, this can give us false signals. We might think that a new trend may be developing but in reality, nothing changed.
In the next lesson, we will show you what we mean, and also introduce you to another type of moving average to avoid this problem.
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- Silky Smooth Moving Averages
- Simple Moving Averages
- Exponential Moving Average
- SMA vs. EMA
- Using Moving Averages
- Moving Average Crossover Trading
- Dynamic Support and Resistance
- Summary: Moving Averages