Moving averages have been used in financial markets since technical data began and is probably still the most used trading signal used today. A moving average is an average of a moving body of data and is calculated by adding the closing prices of the time framed used together and then divided by the size of the moving average used. It is not important to know the calculation as most charting software will calculate it for you.
Forex moving averages (MA) are basically a smoothing tool to show the trader an overall direction of the trend in what can sometimes be a very erratic candle stick chart. The size of the Ma will depend on the type of trading the forex trader is doing. The shorter term the trade the shorter the moving average will be.
It is common place to find traders using two or three MA's as indicators of when to enter or exit trades. Two MA's set to slightly different sizes can give an indication of trend reversal when they cross over each other and also an indication of trend strength as the separate once moving in the same direction.
Moving averages can also be found becoming support or resistance levels in an ongoing trend, which becomes very useful in setting ones stop loss. Again once in a trade the crossover of the moving averages in the opposite direction can be an indication to exit the trade.
The time frame to which you trade at will be the indication to which you set your moving averages. Moving averages can be used in both scalp trading using time frames as small as 1 minute right up to long term trading using charts such as 1 week or 1 month. It is good practice to use moving averages in conjunction with support and resistance levels on where to enter a trade.
