A moving average or simple moving average (SMA) is an average of a predetermined number of prices over a number of days, divided by the number of entries. The higher the number of days in the average, the smoother the line is.
A moving average makes it easier to visualize currency activity without daily statistical noise. It is a common tool in technical analysis and is used either by itself or as an oscillator.
As one can see from the Figure below the moving average is smoother than the underlying currency. The daily closing price is commonly included in the moving averages. The average may also be based on the midrange level or on a daily average of the high, low, and closing prices. The Figure below shows examples of three simple moving averages—15-day, 30-day and 60-day.
It is important to observe that the moving average is a follower rather than a leader. Its signals occur after the new movement has started, not before.
There are three types of moving averages:
1. The simple moving average or arithmetic mean.
2. The linearly weighted moving average.
3. The exponentially smoothed moving average.
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