A moving
average is simply a way to smooth out price action over time. By "moving
average", we mean that you are taking the average closing price of a currency
pair for the last 'X' number of periods. On a chart, it would look like this:
Like
every indicator, a moving average indicator is used to help us forecast future
prices. By looking at the slope of the moving average, you can better determine
the potential direction of market prices.
As we
said, moving averages smooth out price action.
There are
different types of moving averages and each of them has their own level of
"smoothness".
Generally,
the smoother the moving average, the slower it is to react to the price
movement.
The
choppier the moving average, the quicker it is to react to the price movement.
To make a moving average smoother, you should get the average closing prices
over a longer time period.
Now, you're probably thinking, "C'mon, let's get to the good stuff. How can I use this to trade?"
In this section, we first need to explain to you the two major
types of moving averages:
1. Simple
2. Exponential
We'll
also teach you how to calculate them and give the pros and cons of each. Just
like in every other lesson in the BabyPips.com School of Pipsology, you need to
know the basics first!
After
you've got that on lockdown like Argentinian soccer player Lionel Messi's
ball-handling skills, we'll teach you the different ways to use moving averages
and how to incorporate them into your trading strategy.
By the
end of this lesson, you'll be just as smooth as Messi's!
Are you
ready?
If you
are, give us a "Heck yeah!"
If not,
go back and reread the intro.
Once
you're pumped and ready to go, head to the next page.
