The Forex Moving Average is one of the forex indicators that you DEFINITELY NEED to be familiar with if you want to profit from the market. It is the most important sign to know, especially for a newbie!

### what is moving average?

A statistical instrument called a “moving average” provides the average price over a specified period of time. All forex traders ultimately strive to generate broad forecasts regarding the price movement of a currency or forex when it is plotted against a graph. We may determine the price’s direction by examining the slope of a moving average.

Simple moving averages are the most often used moving averages, and they are generated for each point in time by adding all of the prices for a certain period of time and dividing that sum by the total number of set prices.

### How Do You Trade With Moving Averages in Forex?

Moving averages may be used in trading in a variety of ways, and it would be impossible to cover them all in one article. However, one of the most popular approaches is known as the “moving average breakout,” in which candlesticks are sought after watching the graph for instances where the price crosses the moving average. The graphical phrase for a graph’s tail is called a candlestick. They alert the trader that they should make a profitable move.

### An Example to Understand Moving Averages

In mathematics (or statistics), a *moving average* creates a series of *averages* of different subsets of the full data set in order to analyze data points.

For example, imagine in a game of Cricket, we want to analyze the performance of a bowler. Here, the parameter that we can use for our judgment is the number of runs conceded against every wicket picked. Let’s assume that we have the following data available for the bowler:

From the table above, the total runs conceded by the bowler over 9 innings is 445. Further, he has got 20 wickets against his name. Therefore, the average number of runs conceded per wicket will be equal to 445/20 = 22.25 runs conceded per wicket This is the simplest method that we can use for calculating the average.

A similar concept can be used while looking at the price movements of the shares. Through this article, we will try to understand the concept of the moving average and its implication while trading.

### What are Moving Averages?

Moving averages are the most common and sought after form of technical analysis tools used while trading. These indicators are said to be lagging indicators, as is it is constructed with the help of the data presented as the end of day prices.

In order to understand this concept easily, let us take another example. Consider the following closing prices for the shares of Reliance Industries limited:

Now, a simple moving average (SMA) is a calculation that considers the average or arithmetic mean of a given set of prices over a specific time period. For example, the SMA or average price of shares of RIL over these five days will be equal to 9085/5 = Rs. 1,817

Next, imagine if the share price of RIL at close on 10/07/2020 is 1,800. Now, if the calculate the moving average again for the last five days, its value will change as the average price changes after accounting for new data. In other words, the average price changes as and when the value of underlying asset changes on day to day basis.

Further, the moving averages can be calculated for any time frame. It could be 5 minutes, 15 minutes, hours, days, weeks, and so on. Depending on one’s trading style and trading objective, one can choose the Moving Average charting pattern. If we are using 5 observations within the selected time frame, it is called 5 SMA, and if we are using 9 observations within the selected time frame, it is called 9 SMA and so on.

Now, the chart below is the daily chart of Airtel Limited. And we have plotted 50 Day Simple Moving Average on it.

Now, if you carefully analyze, the 50 SMA clearly bifurcates the chart in two halves. When the market is trading over 50 SMA, we see continuous buying momentum in the market and the bulls are having a tight grip on the market. And as and when the market comes below 50 SMA, we see selling pressure in the market and the bears are having higher say in the market. Overall, in simple words, it can be said that prices above SMA are considered to be bullish and below it are bearish.

### Exponential Moving Average (EMA)

Exponential Moving Average (EMA) are slightly advanced and more trusted form of moving average. The main difference between EMA and SMA is the weightage given to each and every value under consideration.

Under EMA, the more recent values are given higher weightage, but in SMA, all the values are given equal weightage. For this simple reason, EMA is sometimes said to be a better parameter for trading than SMA. We will not be going to explain the calculation methodology of EMA in this article.

The chart below is the daily chart for HDFC Bank and the yellow line plotted is the 50 EMA.

Now, before explaining the chart, the following rule has been set for the entry and exit of the trade. A position is entered when the current price crosses over 50 EMA and the position is held till the share price down not crossover or come below 50 EMA.

If we look at the chart, the 50 EMA in the chart above has given multiple entry and exit signals based on EMA. For example, if we look at Trade 1, the chart gave a long trade as the market came close to the EMA and it bounced back and gave a return of about 15% (not bad by any standards). And similarly, Trade 2 gave an entry near EMA and upon exit, it gave a return of near 7%.

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