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The Forex or foreign currency exchange market is currently one of the largest in the global financial markets. Traders who take part in this market aims to earn huge profits when the exchange rates fluctuate quickly. In an effort to predict the price changes, the traders usually apply various technical indicators to Forex charts. Of all the technical indicators, the simple moving averages are among the most popular today.

First and foremost, you should know that the technical indicators are really preprogrammed formulas which use price actions in the past to determine the performance of a Forex currency. When traders apply the indicators to a Forex price chart, they will appear beneath or overlaid the chart.

Choosing the moving average will allow you to take advantage of not just the most popular indicator, but also the oldest and simplest. The SMA indicator is extremely user-friendly and easy to understand. If you want to understand the trends, this tool can prove to be one of the most effective trading indicators.

What is a Forex Simple Moving Averages?

A moving average basically identifies the average price for the last several days, including the hours or minutes and this price is then plotted as a single point on the Forex bar chart. Every new bar would create a new calculation for the average price. Whenever all of the average points connect, a line would appear moving up or down to indicate if the average price is decreasing or increasing.

Since the prices follow a trend, the simple moving average indicator is also called a lagging indicator. Traders usually rely on this tool when the market prices trends in a definite direction, whether up or down. The Forex simple moving averages will not be a reliable tool when the markets are moving in a sideway direction.

Let’s take a brief look at a simple moving average equation.

You would add the closing price and then divide by the period for the moving average. Of course, you can choose the number of days that you want to use. Traders generally use anywhere between five and two hundred days. In any case, the aim is to find the trends during specific periods and smooth out the daily price fluctuations which are triggered by the market volatility.

Basically, this is founded on the concept that the short-term price increases will not last because they are brought on by human emotion. So, the prices will eventually return to a fair value or the moving average.

The actual value of the simple moving averages lies in identifying areas with value to sell or buy in strong trends as well as to show when a trend finishes if there is a broken moving average.

Finally, the most important thing to remember when using the moving average technical indicator is that it’s always moving. Therefore, all the new candles on your Forex chart will have an effect on the MA. There are additional resources available if you want to know more about Forex simple moving averages.

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