What Do You Need To Know About Moving Averages?
Moving averages is a term probably all of us have heard at least one. A moving average is simply a measure to smoothen out the price action over the course of time. Moving average means taking an average closing price of a certain currency pair for the last X no. of periods.
The main reason why moving averages are used is simple; it is used to forecast the future prices. We can assess it by looking at the slope of the moving average. Taking out the moving average in this way helps us determine the upcoming direct of the market prices. And we all know how many benefits this has. The markets are always unpredictable and that is why we push ourselves to know, understand, observe and learn the moving averages to help us get a good direction of the market.
Moving averages are of different types and every moving average has its own level of smoothness. The general rule as far as these averages are concerned is, the smoother the moving average, the slower it will be to react to the price movement. On the other hand, the choppier the moving average will be, the quicker it will react to the overall price movement. The whole point is to get the average on the closing prices over a long period of time to assess the markets better.
When it comes to moving averages, it is important to remember that there are two types; one is simple, the other is exponential.
Simple Moving Average
A simple moving average is an arithmetic moving average which is calculated by adding the closing price of a given security for a given amount of time periods and then dividing the total by the overall number of periods.
The biggest advantage of simple moving average is that it reacts quickly to the price changes. Moreover, it is also easy and faster to calculate which makes life simple and easy. The simple moving average gives you a go ahead on the current market prices in a timely fashion.
Exponential Moving Average
The exponential moving average is considered as a type of moving average that goes hand in hand with simple moving average. However, in exponential moving average, more weight is given to the obtained data. The exponential moving average is the same as exponentially weighted moving average. The biggest advantage of exponential moving average is that it reacts way faster to the recent price changes as compared to the simple moving average.
Benefits Of Moving Averages
In general, there are many benefits of taking of moving averages.
- They smooth out price data: One of the biggest advantages of moving averages is that they are able to smooth out price data, giving you a good and deep insight regarding the market trends.
- Helps in creating an easy interpreted visual aid.
- Is used as a specific statistical tool that is used with other data sets to calculate prices.
Moving averages are one of the most popular tools used for observing market trends. There are two types of MA; simple and exponential. Both have different benefits and are used for different purposes.