Forex Charts with Moving Averages

Moving averages explained
How to use moving averages
Trading ideas with moving averages

Moving Averages Explained

A moving average graph is a price chart that includes one or more moving averages. The moving average is a price indicator within technical analysis. It works automatically after the trader adds it to their Meta Trader 4 (MT4) or Meta Trader 5 (MT5) platform. The moving average chart indicates the average price level of the past. The moving average period indicates the time period:

A value of 10 means that the moving average is calculated based on the past 10 closed candles.
A value of 50 means that the moving average is calculated based on the past 50 closed candles.
A higher number means that the average is calculated on more candles over a longer period of time.
A lower number means that the average is calculated on less candles over a shorter period of time.

Types of moving averages

There are multiple ways of calculating the moving average with different logic. Let’s review the four main ones, which are the SMA, EMA, SMMA, and the LWMA. All of them can be found on the MetaTrader (MT) platform.

SMA

The SMA stands for simple moving average. Each candlestick has an equal weight when calculating the average.

EMA

The EMA stands for exponential moving average. It adds more emphasis on the most recent price levels in its calculations. This means that the EMA will respond quicker to current price action than the simple moving average.

Smoothed (SMMA)

The SMMA is similar to the SMA because it aims at reducing the noise rather than the lag. The SMMA has a longer period than the EMA and SMA, so there is a smoother angle.

Linear weighted (LWMA)

The linearly weighted moving average assigns more weight to recent data than older prices. It uses a linear calculation where each day in the past loses the same magnitude of importance.

Moving Average Charts Explained

The moving averages charts offer traders a quicker and better way of understanding price movements and price charts. They are useful in determining moving averages chart patterns too. The indicator is automated so traders only need to add the indicator to the chart. After that, the platform will update the moving averages automatically. Let’s review all of the benefits one by one.

Determining the trend

Moving averages are one of the best indicators for seeing the trend quickly. Here is how charts moving averages indicate the trend:

Uptrend: price action is above the short-term moving average. Short-term moving average is above the long-term moving average.
Downtrend: price action is above the short-term moving average. Short-term moving average is above the long-term moving average.

Traders could even use a third layer of moving averages for an extra trend dimension. However, most traders use two sets of moving averages.

Reversal or range

Moving averages also indicate the end of a trend, reversal or range. A reversal could take place when the moving averages make a cross-over. A range is unfolding if the moving averages are flat and hitting each other regularly.

Impulsiveness versus correction

The steep angle of the moving averages also indicate whether price action is impulsive. A shallow angle, however, indicates lack of momentum and a correction. The period of the moving averages are usually short-term like for instance 5 to 20 EMAs. Anything higher is already too slow for indicating momentum.

Support and resistance

Finally, moving averages can also be used as support and resistance. Price action breaking above or below moving averages could indicate a breakout. Price action respecting the moving averages indicates a potential bounce. Using a moving average zone helps traders see a larger area of price action, which makes it easier to see if price action has made a breakout or bounce. Many traders prefer to use a 20 ema high and low to create that zone. They can also use a 150 and 200 ema to create a similar zone.

Divergence pattern target

When divergence appears within a trend, the long-term moving average is one of the main targets for the retracement:

Bearish divergence in an uptrend: price action is expected to retrace back to the 100-200 ema zone.
Bullish divergence in a downtrend: price action is expected to retrace back to the 100-200 ema zone.
Reversal traders can use the moving averages as a potential target.
The divergence pattern is strong on a 4 hour chart or higher. A double divergence is needed on a 1 hour chart or lower or divergence on multiple time frames.

Trading Ideas with Moving Averages

Traders can find trading ideas around short-term moving averages and long-term moving averages. Most traders use round levels like a 20 ema as a short-term moving average and 100 or 200 ema as a long-term moving average. Some traders use Fibonacci sequence levels for the moving average period such as a 21 ema as the short-term moving average and the 144 ema as long-term moving average. Traders can trade breakout and bounce trade setups at the short-term moving averages and long-term moving average:

Traders can trade a close above or below the moving averages for a breakout.
Traders can trade candlestick patterns if a bounce takes place.

These bounces and breakouts occur often around the 20-50 moving averages and 100-200 moving averages. The Forex charts with moving averages offer potential trading setups for traders on all time frames.

What Did We Learn From This Article on Why Moving Averages Always Remain Key for Charting?

The first task of this article is to simply explain how the moving average works. There was also a review of the different types of moving averages including the EMA, SMA, SMMA, and LWMA. After that, there was an overview of how moving averages can be used for analysing the chart. They are particularly useful for spotting the trend, identifying reversal and range, seeing impulse versus correction, and trading breakouts and bounces. Last but not least, this article discussed how to use moving averages for price patterns and trading ideas.

Detailed Info on Insights / Common Questions on Why Moving Averages Always Remain Key for Charting?

Question: why are moving averages important?

The moving averages offer traders a quicker and better way of understanding price movements and price charts. Moving averages indicate the trend by comparing price versus short-term moving average and short-term moving averages versus long-term moving averages. Moving averages also indicate the end of a trend, reversal or range when moving averages make a cross-o