Forex trading is a trade that requires not only instincts, albeit good instincts proving to be extremely beneficial in the long run, but also a bit of smarts. For those who are afraid of math, trading currencies could either make or break you in that aspect. Math is an especially useful tool in forex trade, and although programs used to help predict future market prices and establish trade patterns already exist, a basic background on the principles underlying these programs is vital to forex trade success.
One of the easiest tools available for forex trade is based on Moving Averages. Moving average based calculations are often used by technical market analysts in predicting market prices due to the ease it brings when it comes to spotting trends in more volatile markets. Understanding moving average based calculations may prove to be extremely helpful in the long run, seeing as many other forms of market forecasting are based on this principle. Simply think of moving averages as simple arithmetic calculations, without which basic algebra and complex differential equations will fail to make any sense at all.
Types of Moving Averages
Market forecast computer applications based on moving averages come in many interfaces and names. However, all of them are either simple moving averages, or exponential moving averages. These are the most basic types of moving averages, and most moving average based applications simply come from either of these two.
Simple Moving Average
A simple moving average forecasts prices for a certain day by calculating the average of values during a certain amount of time immediately past. For example, on a simple, week-long moving average, prices can be predicted by simply adding all values for the past week, and dividing the sum by 7. Concretely, if prices for a week were $4, $3, $7, $8, $8, $9, and $7, consecutively, a forecast value for the day immediately following the last figure ($7) can be established at $6.57 (the average of all given values for the week).
Exponential Moving Average
Exponential Moving Averages come in two different forms: percent-based and point-based. Either way, these calculations employ a certain equation that will require the help of computer programs for accuracy, especially when longer periods of time are involved. Compared to simple moving averages, exponential moving averages tend to provide more precise immediate forecasts.
Often, traders use a combination of these types of moving averages to aid them. Exponential moving averages are great for predicting immediate changes in the market pattern, whereas simple moving averages tend to be more accurate in the long-term. A combination of these two types of moving averages ensure both short and long-term success in forex trading.
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