What is Moving Average in Forex Trading?

One of the most used tools in Forex trading analysis is the moving average.

The term moving average in online Forex trading refers to the manner in which price fluctuations are smoothing out in a given time period to show the actual trend of prices in the market.

In other words, the moving average smooths out price fluctuations so that a forex trader can see how the price of a specific currency pair is moving.

The moving average is derived by joining the midpoints or averages between closing and opening prices of a currency pair for a given number of periods.

using moving average in forex trading

From the figure above, the red line represents the moving average for 1-hour periods of GBPUSD for 5 days. It shows that the trend is moving downwards.

The moving average (MA) is used in forex trading to predict future prices. Since prices do not move in a straight line, you cannot just look at the current price and predict future prices. You have to look at several price levels collectively. The moving average tool helps you to find a trend in scattered price levels for a given period of time.

You can use the moving average to predict the price of currency pairs by looking at the slope of the curve. When the curve is sloping upwards, it means that the price is increasing. For instance, in the figure above the future price of GBPUSD is likely to be lower than the current price. This means that the GBP is becoming weaker compared to the USD. The market is bearish.

The Length of the Moving Average Matters

It is important to choose the right number of reporting periods when drawing a moving average.

If many or lengthy periods are chosen for the moving average, there will be too many data points to deal with. This leads to a moving average that is too smooth that a trader may not be able to see the trend clearly.

On the other hand, if a short period is chosen, the data points will be too few such that the moving average stays too close to the current price, and the trader cannot be able to predict future prices clearly.

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