A moving average is a way to smooth out price movement over time. It basically means taking the average closing price of a currency pair for the last “X” number of periods.
Just like all indicators, a moving average indicator is used to assist us to forecast future cost. By watching at the slope of the moving average, you can control the possible way of market prices.
Every types moving average has their own level of smoothness.
Normally, the smoother the moving average, the sluggish, it is to respond to the price movement. The rougher the moving average, the faster it is to respond to the price movement. To create a moving average smoother, it should get the average closing prices within a longer time period.
Two major types of moving averages: Exponential and Simple.
The short period exponential moving average is best used when you want a moving average that will react to the price movement pretty quickly.
These can support you catch trends very early which will result in greater profit. Actually, the earlier you catch a trend, the longer you can ride it and degenerate in those gains.
However, the disadvantage of using the exponential moving average is that you might get faked out during merging periods. For the reason that the moving average reacts so quickly to the price, you might consider a trend is starting when it could just be a price point. This would be an instance of the indicator being too quick for your own sake.
Meanwhile, it is completely different with the Simple Moving Average. When you need a moving average that is smoother and slower to react to price movement, then a longer period Simple Moving Average is the best way for you. When looking at longer time frames, this would work really well, as it could give you knowledge of the complete trend.
Even though it is sluggish to react to the price movement, it could perhaps protect you from many fake outs. The weakness is that it might delay you too long, and you might miss a chance on a good entry price or the trade completely.Publication source