Three Lines Forecasting Forex Price Action by R. Rana

Author:R. Rana [Rana, R.]
Language: eng
Format: epub, pdf
Published: 2016-03-07T23:00:00+00:00

SMA AND EMA

Simple moving average (SMA) in conjunction with supply and demand strategies provides an extra level of assurance that a trade may work in favor of the trader. A simple moving average is calculated by calculating the average price of an instrument over a specified number of periods. For example: a ten-day simple moving average is the sum of ten days’ closing prices divided by ten. Popular SMAs in Forex are periods of 50, 100, and 200 days. An exponential moving average (EMA) gives more priority to recent closing prices. There are three steps to calculating EMA. First, calculate the SMA over a specified period of time; second, calculate the weighting multiplier; last, calculate EMA using the formula given below.

The formula for a ten-day EMA:

•SMA: 10-period sum/10,

•Multiplier: (2/(Time periods + 1)) = (2/(10 + 1)) = 0.1818 (18.18%),

•EMA: [Close - EMA (previous day)] x multiplier + EMA (previous day).

A ten-day EMA applies an 18.18% weighting to the most recent price. The most popular EMAs for Forex trading are periods of 10, 20, 30, and 50.

Traders use SMA and EMA in order to identify trends, using different period moving average crossovers. For example, a 10-period moving average, which is called short, and a 100-period moving average, which is called long crossover. These indicate trend reversal. An EMA reacts faster than an SMA. The reason is that it gives more weight to recent prices, whereas an SMA provides a currency’s true value. There are also bullish and bearish crossovers. Bullish crossover means shorter moving average crosses above the longer period’s moving average. When it crosses below the moving average, it’s called a bearish crossover. All kinds of moving averages are lagging indicators, because they provide late signals about value. Traders use moving averages in combination with support and resistance indicators to create confluence factors.

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