One of the most commonly used technical indicators is what is known as a moving average. This is simply a calculation of the average price of the currency pair over a given period of time shown moving consistently with that pair over time. In other words, the moving average will ebb and flow with the currency pair as it bounces up and down.
The trader can easily see if the currency pair is currently trading above or below the moving average, and they may make some trading decisions about how they would like to respond to these movements as a result.
The moving average is intended to be used to try to predict future pricing just like all of the other technical indicators that one has access to. The use of the moving average is helpful as it shows roughly where the currency pair has been trending recently, and this may be applicable to estimating where it might go in the near future. People use these types of movements all the time to try to figure out how they should trade a pair, and if it makes sense to buy more or sell more at this time based on how the currency pair has performed leading up to this moment.
Length Of Time
It is highly important to note that the length of time that one examines the moving average over is vital. A short-term moving average can be very volatile as there is a lot of pricing action that happens in a short period of time, and much of it may not make a lot of sense. That said, people who play these moving averages out over a longer period of time may start to see certain trends emerge that they can actually put to use and gain something valuable from.
This is why it is so important to play out the moving average over a length of time that is truly useful. To do so, you will need to set your parameters just right and make sure that the windows of time and long enough to provide actual value to you.
Showing The Lag
The real value in moving averages is to show the lag between the average as it has been mapped out over a period of time versus the price that it currently stands at. If there is a lot of difference between the two values, then you are seeing some of the lag in the system between where the price was, and where it is now.
What could be useful from a trading perspective here is to see if the price has moved much beyond where it should be compared to where the trends indicate the price ought to land. This is to say that if the price is significantly above the moving average, and the general trend for the currency pair is down, then now might be a good time to get short the currency pair. The same can be said in the reverse as well. It is simply a great way to identify where there is some difference between what is expected, and what has actually happened at this stage of the game. You might be surprised by just how valuable this information can be to you, and just how much you can use it to make predictive trades.
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