Moving Average Indicator- Three Different Types You Should Recognize
Forex is one of the fascinating financial assets to trade. It usually involves high risk. But if managed properly, it can be the star performer of your portfolio. Technical analysis is one of the ways with which you can trade. There are some tools like indicators to help you make better decision. As a technical trader you should know technical indicators. Technical indicators help you unravel the hidden meaning of the currencies. Moving average indicator is one such type of indicator. These indicators are useful in identifying the beginning or the reversal of the trend.
Elementary Form of Indicator
It is the simplest form of moving average indicator which is an average of the prices of certain period. You give the periods as the input. 21 days moving average is most common. This is nothing but an average of the currency prices of last 21 days. For the next day, price of first day is excluded and yesterday’s price comes in. There are some variations of this indicator like exponential with some mathematical variations. You can identify the trend in two ways. The direction of the graph will tell you if the trend is up or down. The second method is to look the location of the indicator. If currency is above the indicator then trend is up and if it is located below the indicator, trend is considered to be down.
Add Envelop to Indicator for More Data
Next type of moving average indicator is called moving average envelop. It presents you more information than simple indicator. It has a band around the price which tells you if the currency is overbought or oversold. Envelop is formed at equal percentage above and below the average. Currency you analyze and the timeframe will decide the percentage of envelop. If the currency is above the indicator and touching the upper band, the trend is up. The price below moving average and closer to lower band will tell you the down trend. If the price is flip flopping above and below the indicator without getting close to either of the bands, then you can safely interpret that the currency is consolidating. This indicator helps to determine the trend or the consolidation phase.
Advanced Version of the Indicator
This moving average indicator popularly known as MACD is an advanced version of moving average. It takes 3 inputs as exponential averages of three different periods. The indicator consists of two line. The default value of the inputs are 12, 26 and 9. The first line is the difference between the fastest and slowest averages. By default it will be the difference of 12 and 26. This line is known as the fast line. The exponential average of third input is called signal line. For the default indicator it has a value of 9. When these two lines cut each other, it is considered to be a buy or sell signal. Other variation is called line MACD indicator.
The trend is confirmed when you use moving average indicator with the price of the currencies. In the absence of the trend, it is of no use. Identify the trend and use this indicator for buying and selling the currencies.
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