Moving averages is the creation of averages from a full data set for a particular period. Moving average variations can either be weighted, cumulative and simple form.
Moving averages is one of the leading Forex market indicators. The forex market is very unstable and it is characterized by market fluctuations, influenced by share prices. These variations affect real –time market trends and data analysis. In this regard, Moving averages are used smooth out the fluctuations also referred as market noise.
It helps in authenticating the trends in the market despite the ups and downs of an average market trend. Moving averages are useful in establishing the market trends for predicting about data pricing. Moving averages are closely related to stochastic measurements and the Bollinger bands (Michalowski, 2011).
Types of moving averages and their advantages
The forex market is characterized by real data and market prices whose prediction is based depending on the method chosen by the traders. In this case, the method applied is moving averages. The investment analyst used moving averages of specific trading periods to make future predictions. The use of periodical moving averages subsets helps in smoothening fluctuating market trends. The smoothening period is conducted after a moving average curve is established, and any outlier is swept out to normalize the pattern. It is a real time series analysis method which is highly used in the forex market. In addition to smoothening, the moving averages are also used to determine false signals in the market. The following chart shows moving average data for 20 period against real time taken on average.
Simple moving averages are the commonly and the most essential. A series of prices over a period is added up and divided by the data points. The process determined the average prices and compared with current prices to determine average price.
For instance, in the course of calculating an average rate, the oldest price is dropped. Weighted moving average follows the same formula as of simple moving average, but a set of linearly weighted values are used to improve the average. For instance, each value in the dataset is assigned a particular weight in the form of binary numbers.
In a very dynamic forex market, the weighted moving average is the most applicated in determining market trends. The following chart shows a sample of a simple moving average and a weighted moving average in the forex market.
An exponential moving average is the calculation of market averages considering the whole historical values without dropping the oldest values. The only difference as compared to a simple moving average is that the oldest data values are not discarded when new values are included in a dataset.
Moving average signals
The moving average line is the determinate of sell signals. If the spot rate moves under the line, it indicates the best time to sell. It means that the current prices are underperforming or losing momentum, investors are encouraged to sell. A classic sell signal is indicated by a spot rate moving under the line. Sell opportunity occurs when the pattern hits double-top at the same time.
The investment analyst settles on the moving average method depending on the nature of market fluctuations and needs. Weighted moving averages create emphasis on the latest rates. The method can generate false signals since the most recent rates are very unstable and unpredictable.
Hence, a certain degree of volatility is allowed in the weighted moving average method. Simple moving averages are appropriate in market noise reduction, but the process lags the buy and sells signals since it does not consider current rates.