Moving averages are perhaps the most commonly used technical indicators in forex trading. MAs are used primarily as trend indicators and also identify support and resistance levels. In forex trading, the 50-day, 100-day, and 200-day MAs are considered to represent significant support and resistance levels. The two most frequently used MAs are the simple moving average (SMA), which is the average price over a given number of time periods, and the exponential moving average (EMA), which gives more weight to recent prices.
Moving averages are fast rising in popularity nowadays and if you use it properly, you will surely gain huge amount of profits. However, a lot of forex traders commit critical errors in using it which make them lose more often.
Moving averages have the same goal. They are the ones who identify the forex trends in a particular period and they iron out the price fluctuations day to day. The equation they use is adding the closing price and dividing it by the period where it is calculated. This is mostly used by technical forex traders since it is a great tool in identifying trends.
The problem arises when forex traders tend to misuse the moving averages. One example is that, most traders believe that it is a leading indicator-it is not. It is actually a trend line that simply gives direction to where the trend is going at the period they are calculated. Another problem that occurs is that most traders believe that the short time periods most likely to indicate more. Well the truth is, it really doesn't indicate anything.
The volatility in short term periods is random, thus, there is no trend. Day trading traders lose when they use moving averages in this period because simply there is nothing to calculate.
Therefore moving averages are used to identify the forex trend, resistance levels and support, combining them with the momentum indicator that is entering the trade and use the period for a week. It is a great tool that can give you great profits if you know how to use it.