A moving average is simply a way to smooth out price fluctuations to help you distinguish between typical market “noise” and the actual trend direction.
By “moving average”, you are taking the average closing price of a currency pair for the last ‘X’ number of periods.
On a chart, it would look like this:
As you can see, the moving average looks like a squiggly line overlayed on top of the price (represented by Japanese candlesticks).
Chart Overlay
This type of technical indicator is called a “chart overlay“.
The moving average (MA) is overlayed on the price chart!
A moving average (MA) indicator is used to help us forecast future prices.
But why not just look at the price to see what’s happening?
The reason for using a moving average instead of just looking at the price is due to the fact in the real world trends do not move in straight lines.
Price zigs and zags so a moving average helps smooth out the random price movements and help you “see” the underlying trend.
Moving Average Slope
By looking at the slope of the moving average, you can better determine the trend direction.
As we said, moving averages smooth out price action.
There is a variety of moving averages, and each of them has its own level of “smoothness”.
Generally, the smoother the moving average, the slower it is to react to the price movement.
The choppier the moving average, the quicker it is to react to the price movement.
To make a moving average smoother, increase the average closing prices over a longer time period.
