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SIMPLE MOVING AVERAGES
Doug Schaff
FX-Strategy
| Characteristic: | Trend Direction Indicator | |
| Parameter Defaults: | SMA Period | 10 controls the measurement period for the average |
| Plots: | SMA |
Moving Averages are commonly used as a tool for trend identification. It calculates and plots a simple arithmetic average of prices for a specified period.
| SMA = | Sum of "x" period closes |
| X |
Many users will consider the direction in which the average is moving and the relative position of prices and the moving average. A rising moving average values and prices above the moving average would indicate an uptrend. Similarly, a declining moving average values and prices below the moving average would indicate a downtrend.
It is important to consider the lag in the moving average caused by the fact that it is taking historic data into consideration. Several lengths of the moving average should be considered.
The chart displays the basic use of identifying price/trend direction. However, it does also highlight the weaknesses of moving averages – the lag in identifying price direction changes and the problems caused in consolidating markets when the close can oscillate around the average, providing no clear direction in price.
