What are moving averages?

Moving averages are indicators of technical analysis used in Forex, which will help to identify trends to take the market over a period of time determined by the trader with the currency of their choice, taking as reference the average price currency. (Also known as MA). It’s called “moving” because it always indicates which will be the average price of the current pair. Thus, the average is in constant motion, this will keep prices of the currencies in the market.

There are four types of moving averages:

• The simple moving average (SMA: Simple Moving Average): This is the average mentioned above, this has the characteristic that each day that passes, it eliminates the first day of the series in the calculation and adds the last day.

• The exponential moving average (EMA: Exponential Moving Average): Includes all historical data, applying a weighting exponential (the exponential average of the first day is the closing of that day). This average places priority on closing prices (current data) and less priority to older data. It is determined by the following formula:

Today’s Average = yesterday + (Today’s Close – Yesterday´s Average) x (2 / n +1)

• The weighted moving average (WMA: Weighted Moving Average). It gives priority to the most recent prices, so that recent prices have more influence than the former ones.

• The smoothed moving average: Assigns the same weight on past prices, but not to recent prices.

The difference between the simple moving average indicator and the last two is that the moving average uses the same weight for each period and the EMA and WMA assign more value to the periods that are closer.

Using the moving average indicator

It is important to first establish the time period you want to trade; you can take long periods of years or months or you may take periods of days and hours, take the one that you may use. But it is important to note that like any technical indicator, the time frame in which you trade is very important because it determines the probability of the success of a trade.In theory, in major timeframes, more exact the signals to trade. In this case, while the shorter the time period moving average is it will be more sensitive to price changes but less robust. If, however, it provides long periods of time it will be less sensitive to price changes but also more solid.

For example, for you can determine the simple moving average of the USD/EUR over a period of 20 days. In that period the data collected of prices that has had this pair during this time and then it will divide it by the same number the period you set (in this case 20). When you get to determine the average in the market, you will be able to identify trends in it.

The common formula for calculating the moving average is:

The moving average is the result of the sum of the last N values of the price or price in the market, divided by N

Formula: μ=∑xi/n

• μ should be read as mu and it is the moving average we want to calculate.
• N is the period for which we calculate the moving average.
• Xi (where i takes different values from 1 to n) are n values of the share price in the N days considered.

The Moving average indicator are also used to establish significant levels of support and resistance. The periods that are more used to establish support and resistance levels are: SMA (50), SMA (100), SMA (200), EMA (144), EMA (89) and EMA (34).

How to read moving averages signals?

If the price is located above the moving average it is considered that the Forex market is in an uptrend. If the price is set below the moving average it is considered that the market has a downward trend. At the same time you can determine the strength of the trend by observing the pending of the moving average. When there is no pending in the market this means that it has no trend.

When there are crossings between short periods of moving averages with long periods in the direction of the trend, you can observe buy and sell signals. So also when there is disruption of the moving average. This you will see it with more detail in the following graphic.

Moving averages give you signals:

• When 2 moving averages cross
• When there are breakouts in the moving averages

Now let’s see it in the graphic:

1. To see the trend

For example, here we are using the moving average to identify the market trend. In this case we are using the rule’s position in the market price in relation to the moving average.

• We see a 20 in yellow
• 100 in red
• 200 in blue

Here is an upward trend since the price is above the moving average.

The rule is: When price is above the moving average it will show an upward trend and on the other hand, when the market is below the moving average then it will follow a downtrend.

The following chart shows a downtrend, since the market is below the moving average.

2. When the averages are growing:

Other methods are for example when crossing moving averages may be an indication to buy or sell

• We see yellow at 20
• In 100 red
• In 200 blue

When the yellow line crosses (short period to 20) the line with the long-period moving average (200) it indicates that it activates the signal to sell.

When a short-period moving average (yellow line) goes down and crosses a long-period moving average (blue line) it activates the signal to sell.

When a short-period moving average (yellow line) goes up and crosses a long-period moving average (blue line) it activates a buying signal.

3. When used as support/resistance

The moving average indicator can be used as support or resistance, on the graph the level of support we see rejects the growing market that is approaching.

Remember that no investment is risk free and the moving average indicator in Forex will help you most effectively when used in conjunction with other tools.

If you would like to have more information please click here: Moving Average Indicator

What are Bollinger bands? It is a technical analysis indicator used in the financial markets, which is used to determine market volatility and relative prices in a period of time indicated by the trader.

This technique was developed by John Bollinger in the early 80′s. Bollinger was based on mathematical formulas commonly used by statisticians to determine the standard deviations of the data series and adapted for use in the Forex Market. Bollinger bands are used to determine over-bought and over-sold levels.

The use of Bollinger bands Indicator is more effective when the Forex markets is without trend (ranging markets) and it is suggested that it should be applied in periods of 20 days but it may also be used even in periods of 50 days.

Bollinger bands consist of three lines drawn in relation to price action. These three lines are:

• The middle or central band: it is as a rule; a simple moving average and provides information on market trends. From the middle band it is calculated upper and lower bands by one standard deviation.
• The upper band: is equal to a moving average of 20 periods and 2 standard deviations above the moving average.
• The bottom band: is equal to a moving average of 20 periods and 2 standard deviations below the moving average.

How to use Bollinger bands to invest in Forex?

You, as a trader, can use this indicator to determine market volatility and relative prices. You must start tracing the 3 lines in the graphs, which provide you with the indications of when you should start trading.

In Markets without trends the strategy is to sell in higher bands and compared in the lower bands. The interval between the upper and lower band will provide you with information on the volatility of the market activity. This means that the higher the volatility in the Forex market is, the higher the standard deviation and because of that the bands are a little broader. If on the contrary, it happens that there is less volatility in the market, the lower the standard deviation and thus the bands will be narrower.

On the other hand, if you notice that prices will break through the upper band, in the band that is contrary then we should expect a continuation of current trends.

Calculate the moving average (MA) using the following formula:

MA = (P1+ … + Pn)/n

Pn = Price at an interval n
n = Number of periods

• Subtract the moving average (MA) of each data point (p) used in calculating the moving average. This will give you a list of deviations (d) of the mean:
• Calculate the three Bollinger Bands using the following formulas:

Superior Band = MA + 2σ
Media Band = MA
Lower Band = MA-2σ

It is not recommend using this indicator in fluctuant markets. But if you do, you should buy right on the break above the upper band and sell right on the break below the lower band. This is important if you notice that the bands shrink too fast, in other words it consolidate, it is likely to occur a violent break, a moment you can use to buy or sell.

Bollinger Bands provide you with 3 types of signals:

• Contractions (squeeze) means that there is less volatility in the market.
• Expansion (expansion) means that there is greater market volatility.
• 2.0 STDV close : Breakouts

What you should NEVER do?

• Never buy or sell without observing the candlestick patterns.
• Do not buy or sell if it has not detected a clear breakout of the market.
• Do not use this indicator in periods longer than 100 days.
• If currency prices touch the band alone, it does not mean that you should buy or sell. Never trade without a preliminary analysis.

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Remember that no investment is risk free and the Bollinger Band indicator in Forex will help you most effectively when it is used in conjunction with other tools.

If you would like to have information about Technical Analysis, Please Click Here: Forex Trading