Forex Moving Averages

Forex Moving Averages are one of the most useful tools in trading. Basically a Moving Average is a noise filter, filtering out high frequencies (almost all filters used in trading are low-pass filters). The only variable you can adjust (normally) is the length. Longer means smoother and shorter means more responsive. I strongly recommend that you look beyond the following canned types that are available on all trading platforms (all Forex Moving Averages are plotted with a period of 13 bars):

Simple Moving Average (SMA) also called a Running Mean.
Weighted Moving Average (WMA), usually linearly weighted.
Exponential Moving Average (EMA), includes DEMA (double) and TEMA (triple).

There are several other better Moving Averages developed recently. Most of these will not be available on basic charting platforms. If your platform has the ability to create indicators through a programming language, then you could program them yourself or let someone do it for you. Some of my recommendations are:

T3 Average
Hull's
Gaussian

Also take a look at the varieties by John Ehler. He has developed a whole range of Moving Averages, including non-linear types. They are all available for free at his web site. See below for some examples:

Hybrid MA
Distance Coefficient Filter
Supersmooth 3 poles

What is then a good Moving Average? That depends on what you are looking for. One way or another you will have to make a compromise between smoothness and responsiveness. Some Moving Averages are inherently smooth (T3) and some are inherently responsive (Gaussian). I think all would agree that smoothness would be preferable when prices are trending and responsiveness when price reach an important turning point. Unfortunately we cannot have both. Whether you are smoothing raw price directly or an oscillator, the choice of a inferior or incompatible Moving Average can have unwanted consequences. The choice of a Moving Average will not make you a successful trader in itself, but it can make you even more profitable. Caveat lector: If you change your type of Moving Average, you need to relearn your existing Trading System.

The canned types have their uses though, especially as a form of Support and Resistance. For some indicators they are the best choice. Below I have plotted 20-bar, 50-bar and 100-bar SMAs, the most commonly used Moving Averages for support and resistance:

As you can see, many times price reverses when it hits the Forex Moving Average.

20, 50 and 100 SMAs

Go to the next part, Forex Graphical Indicators.

Return from Forex Moving Averages to Technical Analysis.