SIMPLE AND EXPONENTIAL MOVING AVERAGES
Simple and exponential moving averages are two mathematical tools used in Technical Analysis for Currency Trading with the purpose of predicting future values of Forex prices.
A simple moving average is the sum of past values of a specific currency pair, divided in the amount of prices used; each trader chooses the appropriate number of prices to be included in the algorithm. For instance: suppose that we are interested in predicting the future price of the EUR USD for tomorrow and we have prices for the previous 5 days: [1.44 , 1.38 , 1.41 , 1.46 , 1.48] so the simple moving average is:
|1.44 + 1.38 + 1.41 + 1.46 + 1.48||= 1.434|
We say that we expect that the price of tomorrow will be 1.434, unfortunately expecting does not necessarily mean happening! 1.434 is just the price for tomorrow in which we have a higher level of certainty.
An exponential moving average is the sum of weighted past values of a specific currency pair, divided in the amount of prices used. We weight each value according with the level of importance we perceive on each value, multiplying each price for a constant number that represents that importance. For instance: with same values in the last paragraph, we want to predict the future price of the EUR USD for tomorrow, but we think that the price of yesterday is more important for the prediction than the price of the day before yesterday and this concept applies for the last periods. As in the simple moving average, you must think about the number of last periods that you want to add in predictions.
Do not worry about the calculation of the simple and exponential moving average; fortunately your Forex Trading Platform will calculate it for yourself!