A moving average (MA) is a lagging indicator that smooths price data by creating a constantly updated average price over a specified period. It filters out short-term noise to reveal the underlying trend direction. The moving average works best in trending markets but loses relevance in sideways or choppy conditions.
Formula
Simple Moving Average (SMA):
SMA = (Close₁ + Close₂ + ... + Closeₙ) / N
Where N = number of periods.
Exponential Moving Average (EMA):
EMA = (Close - Previous EMA) × Multiplier + Previous EMA
Where Multiplier = 2 / (N + 1). EMA assigns greater weight to recent prices.
Example
A trader on the AUD/USD pair calculates a 10-day SMA. The last 10 daily closing prices in pips are: 0.6500, 0.6510, 0.6520, 0.6530, 0.6540, 0.6535, 0.6525, 0.6515, 0.6505, 0.6495. Sum = 6.5175. Divide by 10. The 10-day SMA = 0.65175. The trader uses this as a dynamic support level.
Edge cases
- JPY pairs: For USD/JPY, prices are quoted to three decimal places (e.g., 150.000). Always use the full pip value in the calculation, not just the last two digits.
- ASIC regulation: Australian brokers must calculate MAs using the bid price for sell signals and the ask price for buy signals to avoid slippage in client reporting.
- Non-standard convention: Some platforms use the opening price instead of the closing price for the first period of an EMA. Verify your broker's default setting.
See also
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