Forecast Forex Article
How MACD and Moving Averages Can Help You in Forex Trading
A moving average in currency trading refers to the practice of measuring trends in prices. If you look at the changes in price for a particular currency over a certain period of time, you will get an idea of how that currency has been faring during that period. The idea is that stock traders hope to use this information to deduce what direction the currency prices will go in the near future. The averages ‘move in the sense that as the market changes the averages change. They move with the market, over time.
The problem with this system is that moving averages can only tell you what happened after it happened. The things that are going on in the market right now are not going to be included in the moving average information that you can find at this moment, but that information will be up tomorrow. So there is a great limitation. One way of making the most out of moving averages, so that this limitation is not too crippling to your ability to make good guesses about the future of a particular currency, is to measure averages over a short period of time as opposed to over a long period of time. For example, if you look at the average price of a currency over the past six months, it will in general be less useful in telling you about changes taking place today than a moving average that tells you about the past six weeks, or better yet, one that tells you about the past six days.
If you run two averages of different periods of time, for example one month and one week, then the information received can be used to discover reasons to buy or sell that currency. If the one week average shows a higher price than the one month average it means that the past week has been very good for the currency as compared against the past month, which means that it might be a good idea to buy that currency.
Exponentially smoothed averages are considered more useful than other types of average, like simple moving average and linearly weighted moving average because with exponentially smoothed averages more significance is given to recent activity over past activity that is less recent. This method can consider the entire history of the currency, therefore it is considered to be more useful.
The MACD or moving average convergence divergence method was created by Gerald Appel. It compares exponential moving averages from the twelve and sixteen day measures. If the difference is more than nine days it is thought of as a signal to sell, and if it is more than nine days it indicates a signal to buy. The price of the currency is expected to rise when the MACD is less than nine days and fall if it is less than nine days. Traders use the MACD and the MA systems to try to get a jump on the market trends. If they are successful they stand to gain a lot. |
