The moving average is one of the most basic and popular technical analysis tools in foreign currency trading. Moving averages are used by Forex investors to confirm trends, identify new trends and spot trends about to reverse.

There are three types of moving averages: Simple, Weighted and Exponential.

In a simple moving average each price point over the specified period is given equal weight. The user must define whether the high, low or close is used, these price points are then added together and averaged. As each price point is added to the equation a line is formed and the oldest price point in the sample is dropped.

A weighted moving average gives more emphasis to recent data. Each price point is multiplied by a weighting factor which will change every day. These figures are then added and divided by the total of the weighting factors. The weighted moving average provides smoothing to a curve of prices while being more responsive to recent price movements.

An exponential moving average is another way of giving more emphasis to recent data. A percentage of the most recent price is multiplied by the previous period’s average price.

Fortunately, most charting packages do all the calculations for you.

Traders look to find the optimum moving average for a particular currency pair. This process involves testing the different types of moving averages and varying the time periods used to find a fit for the price data.

Many traders use a few different moving averages on each price chart. For example a trader might use a 5 period, 13 period and 60 period moving average on the same price chart. The trader will look for how the moving averages can be used together to provide confirmation for a trade.

Larger moving averages (eg. the 60 period) can help the trader to confirm the long term trend, but lag behind the price and are slow to respond to a changing trend. Smaller moving averages (eg. the 5 period) can help to spot short term trends and reversals, they follow the price trend pretty closely but are more influenced by normal price fluctuations.

Traders often look for a moving average that has been a line of support or resistance in the past. This line is then used to place stops, profit targets and look for trend reversal opportunities. Many traders also look for the moving averages to cross over to identify a trade opportunity.

Like any other technical indicator, moving averages work with a delay. The moving average line is only a forecast of what could happen in the future, not a guarantee of what will happen.

There are a few other more complicated moving averages you might come across.
- Double Exponential Moving Average (DEMA)
- Triple Exponential Moving Average (TEMA)
- Forecast Moving Average
- Least Squares Moving Average
- Modified Moving Average
- Time Series Moving Average
- Triangular Moving Average
- Zero Lag Exponential Moving Average

The best way to find out how these different moving averages respond to price data is to open up a currency (or stock) trading demo account and try them out on a chart.