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Moving Averages and How Can They Come In Useful for Traders

When new to trading, there are many tools out there designed to help you get your investment career off the ground. From fundamental analysis tools like economic calendars to data investigation systems like price charts and much more in between, there’s something to help everyone get their trading life going.

Moving Averages and How Can They Come In Useful for Traders

If you’ve been researching these options, you’ve likely come across what is known as “moving averages” from time to time. A moving average can help you get an insight into how the market is moving or what direction the momentum is likely to go.

But what is the full extent of the moving average’s usefulness? And what do moving averages look like in practice? This blog post will delve into these questions and find out more.

What Is a Moving Average?

 A moving average is a tool made available by brokers and trading technical analysis providers to help traders and investors understand market momentum.

It automatically gathers the prices in a particular timeframe and then divides them by the number of prices to indicate the average. In that sense, it acts as an “indicator”: a tool that gives traders a sense of where to go.

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The “moving” aspect comes from the fact that these tools tend to be quite dynamic and can update in real-time if desired.

 There are many moving average varieties out there, and it is incumbent on a trader to research which ones are right for their trading plans. Suppose you’re trading the Gold Market, for example.

In that case, it’s worth looking at respected sites like Forex Fraud to get a complete overview of the fundamental and technical analysis tools that are most handy.

Often, these sites will include references to particular moving averages, and you can follow up from there.

What Are Some Examples?

Some moving averages are particularly famous. The simple moving average, or SMA for short, is a relatively uncomplicated average that takes the mean of the prices in the data collection specified.

However, an exponential moving average allows you to prioritize certain parts of the data – such as the prices as they stand at the moment.

In terms of timeframes, there are many different frameworks in which you can view a moving average. Some traders view moving averages on a very short-term basis: a day trader, for example, might look at a moving average of the last few hours.

Those trading on a longer-term basis may also do that but are probably more likely to be looking at moving averages that extend to months or perhaps even longer.

How Are They Useful?

 But it’s only worth knowing the theory about moving averages if you can identify their utility in practice – and if you can apply that utility to the goals of trading, like making money. Some traders get bogged down in technical analysis and moving averages can be one area in which the focus can – if left unchecked – become somewhat obsessive.

While it’s helpful to keep an eye on the averages, you should always have some key questions in the back of your mind.

“Is this tool giving me a clear indicator of what the market will do,” is one such question – and “are my current open positions in line with that” is another?

Should You Rely on Moving Averages?

In a word: no. Moving averages only tell you part of the story. For example, they help provide an overview of market momentum, but they might not be as useful as some other technical indicators in demonstrating other trading trends.

And even moving averages can’t give you everything you need to know when it comes to momentum: markets can reverse despite the trends indicated by the moving average.

Moving averages are not created equal, either, and the moving average tool that works for you on one occasion might not work on another.

It’s important to recognize, however, that this situation is not unique to the moving average. There’s no such thing as a market analysis tool that can tell you everything, and it would be futile to search for such a tool.

On the contrary, moving averages ought to be seen as one tool among many that you have in your arsenal. It may be sensitive to pair a moving average with a candlestick chart, for example, to get as rounded a view as possible of what the market looks like and how it might be moving.

Conclusion

Ultimately, moving averages are helpful tools to have on hand if you’re looking to get something of a scoop on how the market is moving and what its momentum is looking like.

The timeframes in which they move, and the specific differences between each variety, can make all the difference when it comes to finding new insights that help you make firm trading decisions.

It’s rarely a good idea to rely wholeheartedly on moving averages; however, it becomes possible to extract as much help as you can from them by pairing them up with other technical indicators.

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