Sometimes the simple moving average (SMA) that people use when trading is a little too simple to be of much use. This is to say that while it does calculate the average over a period of time between two currencies, it doesn’t necessarily capture the entire picture of what we are looking at as the pair continues to trade. It might provide an altered image of what is really happening in the market, and that could lead some of us to make unwise choices about how to trade in our accounts.
You don’t want to be the person who makes foolish moves in the market based on information that was not accurate, to begin with. Instead, you need to look at the exponential moving average (EMA) for more useful details.
The exponential moving average gives more value or weight to the most recent moves in the currency pair that you are examining. If you are looking at the USD/JPY on a 1-hour chart, for example, then you might see the simple moving average calculating the average over say the last 40 hours or whatever you have set the parameters at. It could provide some details for you, but if there has been a major movement in the pair in the last hour or two, this may not be fully captured in the simple moving average.
The exponential moving average could capture more of this movement as it will give added weight to the last few candles that have appeared in recent hours. This means that the EMA will move up or down more rapidly than the SMA over those last few movements. This might help illustrate that the pair really is doing something different than what it had been doing before, and that might come in handy as useful information to you as you attempt to navigate these markets and figure out what they are all about.
Don’t put your trust all in one indicator of course, but perhaps pull up the EMA alongside the SMA when looking at price movements over a given period of time. You don’t want to miss out on some of the moves because you were looking at indicators that were not providing the full story to you right from the start. It happens to a lot of people, and those people may end up making poor trading decisions as a result of this less than ideal information.
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