Many traders use moving averages as support and resistance indicators, or focus on whether a candlestick has closed above or below a particular moving average. These methods are not necessarily the best way to utilize moving averages. They can actually be used much more profitably by treating moving averages as momentum indicators, indicating the strength or absence of a trend, in conjunction with other entry triggers. This is how they are typically used by Forex trading professionals.

Types of Moving Averages

There are several different types of moving averages and each should be understood before it is used. Almost every charting platform offers all types of moving averages. Note first of all that moving averages can be applied to the closing price, opening price, or the high or low prices of a time series. Typically, they are applied to closing prices, and this is logical as closing prices have great importance, and every opening price is also a closing price or a previous candle. Closing prices have great weight over samples because often it is a level where the price has settled.

So let's look at each type of moving average.

The simple moving average (SMA) is just an average of all the periods that it refers to.

The exponential moving average (EMA) is calculated by giving greater weight to the most recent value. This means that for example if the price has been flat, but begins to rise, an EMA will be showing a level higher than an SMA covering the same look back period.

The linear weighted moving average, which is sometimes referred to as just as a weighted moving average (LWMA or WMA), is like the EMA also calculated by giving more weight to the most recent value, but the weighting is proportionate throughout the data series, whereas the EMA only gives greater weight to the most recent sample.

There are a few other types of moving averages. You do not need to worry about them. These three can give you everything you need.

Important Moving Averages