Moving Averages pt.1

Moving averages provide an average price for a currency pair over a unit of time. For example, the 200 moving average on the 15 minute graph provides the average price for a pair over 200 x 15 minute periods. Moving averages can be used to indicate momentum, indecision and they can be used as a line of support/resistance. There are three main types:

1. The Simple Moving Average (SMA)

The simple moving average is calculated by adding up the closing prices of a set number of time units and dividing them by the number of units. This method is used generally with moving averages of high value (like 200) to provide a general idea of the momentum and direction of a currency.

2. Weighted Moving Average (WMA)

The weighted moving average was an attempt to measure the average price of a pair over a period of time, but provide more importance (weight) to the most recent values. For example, on a 10 moving average, each time unit would be allocated a number 1-10, the most recent price would be given the highest number 10 right down to the oldest price which would have the number 1 and these are the proportions that each respective price would contribute to the final ‘average’ value.

3. Exponential Moving Average (EMA)

This was a development from WMA and provides weight to recent prices on an exponential, rather than linear scale. The idea of WMA and EMA is that they are more sensitive to recent prices and as a consequence more sensitive to present movements.