The moving average technical indicator is perhaps the most widely used indicator by traders in technical analysis. Its popularity is due to its ability to help provide a view on the most likely direction of the markets. It is also a useful predictor of trend changes.

The MA as it is often referred to, smoothes out the daily fluctuations of price movements and is described as filtering out ‘market noise’.

It presents the trader with an average view of price movement over the selected time period. This can then be used to help determine the most likely market trend.

Here are five key things you need to know about the moving average technical indicator in order to use it effectively as part of your Forex trading analysis.

20 Day Moving Average Technical Indicator On USD/CAD

The Moving Average Shows The Average Change In Price

Moving averages show the average change in price of a market over the selected time. When the price action of an asset moves away from its moving average then the trend is deemed to be strengthening. On the other hand when the asset price moves closer to the moving average the strength of the trend is seen as weakening. Piercing a moving average is seen as a confirmation of the change of trend

Configure Over Multiple Timeframes

They can be configured for multiple time frames to show the average movement over the selected time period. Moving averages which are set to run in higher time frames, commonly 50, 100 and 200 day averages are seen as more reliable indicators of market direction.

A Choice Of Moving Average Calculations

The moving average has several variations, each which aim to provide the trader with a more accurate reading of the market. The most commonly used are the SMA (Simple Moving Average) and the EMA (Exponential Moving Average). The EMA proves popular as its calculation gives greater weight to move recent prices analysed.

A Lagging Technical Indicator

While they are popular, they can only provide information as to where the market has been and not where it is likely to go. As a result they are termed as ‘lagging technical indicators’. Traders will often set more than one moving average on their chart with the lower time frame average being used as an early indicator of trend change.

Identify The Trend

Due to the fact that the moving average is used to indicate trends, it is more reliable when markets are trending than in those which display volatity. If this is the case they can be prone to proving false signals. However in this environment they can still be used for providing levels of support and resistance which traders can use as entry points for short term moves in the market.