Technical Analysis Basics: Moving Averages


Moving Averages

Moving averages are another widely used method. Moving averages are simply a smoothed (averaged) representation of the price history. The moving average removes noise and allows the trader to see underlying trends. Traders are especially interested in how the price is deviating from moving average lines, and where moving average lines of different scales cross each other. This is known as moving average crossover.

The larger the scale of the moving average the more points that are used and the greater the smoothing. If you are using a day chart, the 200 moving average for example will calculate the average over 200 days. If you are using the minute chart, the average is over 200 minutes.

Figure 4
Moving averages

Moving averages - crossover signals
 © forexop

Traders take note of where the shorter period moving average crosses the longer period. This is a significant event because it indicates a change in price direction. When the crossover is upwards, this is bullish; when it is downwards, it is bearish.

A special type of moving average is the Bollinger band. The Bollinger band is a moving average line with an upper and a lower band. The width of the bands is a measure of the volatility at that point. A wide band for example means volatility is high. A narrow band means volatility is low.