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Moving Averages and Technical Trading

A moving average is a simple technique that lets chart-makers and analysts sift out a lot of the “noise” that short term price swings create.  A more common term outside of the forex market that means the same thing is a “rolling average.”  You'll hear about the concept most frequently in public opinion polling when election season comes around and people want to be able to spot trends in voting behavior. 

To create a moving average, you take the values of a given currency pair over a certain period of time.  Let's say three days.  That figure is one point in the moving average line on your graph.  The next day, you drop off the last of those three days, and add in that day's numbers.

The benefit is a smoother line with less meaningless statistical noise if you had just made a trend line out of the daily averages.  Moving averages combine some of the short-term sensitivity of day-to-day averages, and some of the stability of a series of larger samples. 

Instead of taking an average of one period – let's say in this example one week – and just comparing it to the next week's data, the moving average let's you see not just the trend after the fact, but how the trend develops as it is happening.