Importance of Moving Averages in FOREX Trading
The moving average (MA) is another instrument used to study trends and generate market entry and exit signals. It is the arithmetic average of closing prices over a given period. The longer the period studied, the weaker the magnitude of the moving average curve. The number of closes in the given period is called the moving average index.
Market signals are generated by calculating the residual value:
A significant refinement to this residual method (also called moving average convergence divergence, or MACD for short) is the use of two moving averages. When the MA with the shorter MA index (called the oscillating MA index) crosses above the MA with the longer MA index (called the basis MA index), a sell signal is generated.
[caption id="attachment_13114" align="aligncenter" width="514"] Calculating Moving Average Residuals[/caption]