What is a Moving Average?
Moving average is simply a Forex technical analysis tool that helps you identify the average price of a certain currency during some specific time. Let’s say for example:
We have two currencies A and B, and we want to know the average of the price (exchange rate) of the currency A last week.
- On Monday, the price of A was 2 B’s. Means if you want to get one A you would have to pay 2 B’s in exchange.
- On Tuesday, the price of A was 3 B’s. Means if you want to get one A you would have to pay 3 B’s in exchange.
- On Wednesday, the price of A was 4 B’s.
- On Thursday, the price of A was 5 B’s
- On Friday, the price of A was 6 B’s.
To know the average price of this currency last week, what would you do? You simply add all the prices together, then divide them by 6 (number of days we are looking at).
2+3+4+5+6 = 20 (Prices of the 6 days added up together)
20/6 = 3.3 (then divided by 6, which is the number of days)
Then, the average price of A last week was 3.3 B’s. And now what we have done actually is created a 6 day Moving Average!
The good thing is that we do not have to do all that work, we have an indicator called Moving Average, that does all the math and give us a visualized up-to-date answer.
How can I add a Moving Average to my chart?
Very easy. I will guide you on how to do so on both Meta Trader or FXCM platforms, the most two popular Forex trading platforms. Pick the Forex trading software you use and just follow the steps:
To add a Moving Average on Meta Trader:
- First, log in to your Meta Trader platform and wait till it fully connects.
- From the menu on the top left of your Meta Trader, choose Insert > Indicators > Trend > Moving Average.
- You will have a message box asking you for details, just choose the number of days you want your moving average to represent and the color, then choose ok.
What are the most popular Moving Averages?
You will meet many different Moving Averages, you will see theme everywhere on your Forex trading journey, they are a part of many indicators and Forex trading strategies. However, when we talk about stand-alone Moving Averages, I got to tell you that there are only two or three that the majority of Forex traders use.
100 Day Moving Average
Did you understand the example above? Well, this is the same, just that we put 100 days instead of 6. Let me explain it again.
- First we take the prices of the last 100 days.
- We add them all together.
- We divide the sum by 100.
This 100 Day Moving Average is, as far as I know, the second most popular Moving Average, that comes only after the 200 Day Moving Average…
200 Day Moving Average
This is the most popular Moving Average, and therefore, it is a very strong indicator, because it is displayed on MANY trader’s screens and they consider it when they make their moves, so they give it more and more power when they use it. Here is how the 200 Day Moving Average is calculated:
- First we take the prices of the last 200 days.
- We add them all together.
- We divide the sum by 200.
Moving Average Buying Signals:
- When the price rises and closes above a moving average.
- When a short moving average crosses up a long moving average. e.g. 50 day moving average crosses up a 100 day moving average.
Moving Average Selling Signals:
- Whe the price falls and closes below a moving average
- When a short moving average crosses down a long moving average. e.g. 50 day moving average crosses down a 100 day moving average.