Moving averages:
In this lesson we will examine, explain and apply the simple moving average to a 4hour time frame chart. Moving averages are one of the most popular and easy to use technical tools available to the average investor. They smooth a data series and make it easier to spot trends, channels, something that is especially helpful in volatile markets. Moving averages are also a great starter for anyone who wants to expand their technical analytical knowledge in any market. I would suggest you log into the DEMO account at FXCM (explained in DEMO section) and pull up the AUD/USD 4hour time chart, preferably a candle stick chart and apply the following.
The simple moving average is formed by computing the average price of a security over a specified number of periods. When ever you input a variable for a simple moving average calculation, it is always the close price of the security that will be included in the calculation. For example: a 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5. For an example, here are the closing prices of ABC stock.
15+16+17+18+19 = 85
85 / 5 = 17
The averages are then joined which creates a curvilinear line, or the moving average line. Continuing our example, if the next closing price in the average is 20, then this new period would be added. As each days ends, a new day will be added and the oldest day will be eliminated (15). Once a price has broken a moving average line, and depending on what type of time frame, it might signal a shift upwards or downwards. As you see in the picture below, it has broken all three moving average lines in the upward direction, and as you can see, it continued to climb higher.
Application: I have posted a chart (click for large view), so just take a look at the points that have broken the various moving averages I use, and apply it to any chart on your FXCM DEMO account, or any chart you want and either send it to me or send me any questions you have regarding this topic.
