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.

Forex investors have already priced in a 50 basis point cut to the value of the USD. Investors expect a 50 basis point cut will see an increase in the value of gold, while a lesser rate cut could see a correction in the price of precious metals.

With economic data today pointing towards a slowing economy with growth in private sector unemployment, there is concern that the 50 basis point cut stock market investors are hoping for may not happen.

While a falling stock market has been proven to consistently boost the value of gold, the precious metal could find itself under pressure as investors and funds are forced to close profitable positions to cover losses elsewhere.

Silver hit a 27 year high yesterday at $16.79 per ounce, with some investors cashing in on profits.

It is expected the Fed will announce its interest rate decision around 7:15 pm GMT.

In other news the Bank of England’s (BoE) inflation report contributed to pressure on the GBP as the Forex market reduced its interest rate expectations. The BoE expects inflation to drop below the desired 2% annual CPI over the next 12 months. The GBP fell briefly as the inflation report was released, but quickly recovered to stabilize about 1.95.

Attention will soon turn to the USD as Forex Investors await Federal Reserve chairman Ben Bernanke’s testimony to Congress, which is expected to cause further weakness to the dollar. The Forex market is expecting Bernanke to suggest that inflation is stabilizing on recent news of retail sales only showing modest gains.

The latest release of minutes from the Federal Open Market Committee meeting (FOMC) revealed that Fed officials are uncertain about the future interest rate direction and are concerned about short term inflation.

Forex Investors reacted to the release of minutes from the FOMC by continuing to reduce their USD holdings, this saw the Euro rise to a high of 1.2650 USD overnight from 1.2590.

The minutes were consistent with the Fed chairman’s Ben Bernanke’s testimony to Congress over the past two days in which he suggested that a pause in rate hikes would be a possibility if economic data continues to point towards slower growth.

Forex Investors holding USD also found little comfort in the recent Philadelphia Federal survey for July which fell to 6.0 index points, well below market expectations of 12.0 index points.

In upcoming events for next couple of weeks, the Federal Beige Book summary of economic conditions will be closely watched as will the next durable goods orders data and the next release of gross domestic product (GDP).