The data on price is smoothed out to form a trend using moving average which is a price indicator. Not only the price direction is indicated, but the current direction is also defined with the lag. They lag because they are totally based on past prices. Moving averages also work as the building blocks for other technical indicators such as MACD, McClellan Oscillator and Bollinger Bands. There are two main types of moving averages: the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). Both moving averages are used to identify the course of the trend as well as to define the potential support and resistance levels. The simple moving average (SMA) denotes the simple average of a security over a definite time period, and the exponential moving average (EMA) indicates the weight in context to more recent prices. Red Star Forex experts have a deep intrinsic knowledge about Moving Average Indicator.


Based on past prices, moving averages lag in the current price action. It simply states that longer the time period for the moving average, the greater is the lag. Therefore, a 200 days moving average will have a higher degree of lag in comparison to a 20 day moving average because it shows prices for the past 200 days. Generally the 50 days and 200 days moving averages are commonly followed by all investors and traders and the breaks in the moving averages are considered to be vital signals for trading. Moving averages denote trading signals on their own when there is a crossover between two averages. A rising moving average denotes an upward trend in security while a declining moving average shows a downward trend. It is similar to bearish and bullish fundamentals in the stock market.

A simple moving average is calculated by evaluating the average price of a security over a defined period of time. Generally the moving averages are based on closing prices. For example, a calculation is based on a 5 day simple moving average is the sum of 5 days closing prices divided by five. Post calculation, the old data is dropped and a new data is made available. The average moves along a specified time scale.

In exponential moving averages (EMAs) the lag is reduced with the application of more weight to the recent prices. Depending on the number of periods in the moving average, weighing is applied to the most recent price. EMAs are different from simple moving averages in the way that in a given day’s EMA calculation depends on the calculations for all the days prior. More than 10 days of data is required to calculate a reasonably accurate 10 days EMA. Furthermore, three steps are executed to calculate an exponential moving average (EMA). First, the simple moving average is calculated for the starting EMA value. In this a simple moving average is taken as the previous period’s EMA in the first calculation. Second, the weighing multiplier is calculated. Third, the exponential moving average is calculated for each day between the starting EMA value and the current day by using the multiplier, price, and the previous period’s EMA value.



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