Forex Trading - Simple Moving Average Vs. Exponential Moving Average

How to?

Entering the Forex options trading foray is a matter one should not take lightly. There may be many people out there who claim that making money in the Forex trader is an easy task, but this is not true for most Forex traders. If anything, Forex trading is an exciting endeavour that can prove to be a challenge sometimes. One of the secrets in making it big in the industry is gaining full understanding of all the concepts involved, including the types of moving average.

There are two types of moving average commonly used in Forex options trading, namely the simple moving average and the exponential moving average. The first one can be calculated by adding up the previous X data points. To illustrate, a seven-day simple moving average of closing price is equal to the closing prices of the previous seven days. The second moving average can be calculated by taking into consideration recent observations as opposed to older observations. The weighting factors applied in this type of average decrease exponentially, thus its name.

There is much debate as to what type of moving a Forex trader should rely on. Both types have their own share of advantages and disadvantages. Some traders express concern over the slow response time of a simple moving average to price action. The delay can cause a trader to miss out on a good trading opportunity. However, experts have pointed out that the slow response time can actually save a trader from various fake-outs, which are commonplace in the industry. On the other hand, an exponential moving average is quick to response to price action. But, as earlier pointed out, this is not always good since it can result to errant signals and fake-outs. It is up to the trader to decide which of the two types of moving average he or she should use in Forex options trading.

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