Moving averages (MAs) are probably the most popular technical indicators used to identify the direction of a trend in the Forex market. They provide very definite support and resistance measures because they can be mathematically calculated with great precision. Moving averages tend to filter random noise into market data by smoothing out the large peaks and depressions of price movement. MAs make it easier to recognize / visualize the trend in the chart.
There are several types of MAs. The simple , most common MA shows the average price over a certain period of time. But she has a disability. It is a late technical indicator and tends to follow with lag the current market price. So when quotes are moving too fast, the effect of this delay can play a crucial role and cost you a fortune. A weighted MA tries to reduce this delay effect by placing emphasis on recent prices, thus enabling the MA to respond more quickly to changing prices. There is also the exponential MA , which, like the weighted MA, gives more weight to current market prices than previous prices.
Traders prefer to use MAs 200, 100, 50 and 20. The MA 200 helps to analyze the long-term trend, while MA 20 is more effective in analyzing short-term price movements. If the market crosses the MA 200 from the bottom up, the technical image for the pair becomes that of a bull (bull). If prices slide below MA 200, there is a trend reversal.
When prices go above the MA, it’s a bullish signal. If the quotes go below the MA, it is a sign of decline. If the short-term MA goes above the long-term MA (for example, MA 20 is above MA 50), it is a bullish signal. And if the short-term MA crosses the long-term MA from the top down, it’s a downward signal.