Successful gold traders can look at a chart and see everything they need to know about where the market has been and where it’s going. If you look at a gold trading chart and your eyes start to glaze over, don’t worry. As you start to understand key concepts like moving averages, you can unlock the power of successful traders and become one too.
What is a Moving Average?
The moving average is simply the average of closing prices within a defined time period. By observing the averages, it helps smooth out price action instead of being distracted by short-term spikes and drops in prices.
A moving average is used as an indicator to predict future prices. Smooth moving averages react more slowly to price movement, while choppy moving averages react more quickly. Moving averages are generally smoother during longer time periods, so try looking at a week instead of a day’s worth of averages, or a month instead of a week, etc.
Simple Moving Averages
To calculate a simple 10-day moving average, you just add together the last 10 closing prices and divide that total by 10. To calculate a 30-day moving average, you add together the last 30 closing prices and divide that total by 30, and so on. It is important to be aware that simple moving averages are more susceptible to spikes, which can give false signals which may affect your view of currency trends. If you think a trend exists that doesn’t, your trading decisions may be affected. Therefore, you may want to observe Exponential Moving Averages instead.
Exponential Moving Averages
Simple moving averages treat all closing prices equally. Day 1 of a 30-day average is given the same weight as day 30, and hour 1 of a 24-hour average is given the same weight at hour 24, and so on. This may not give you the most timely and relevant view of trends that you need.
Exponential moving averages address this problem by putting more weight on the most recent closing prices. In a 10-day average, days 8, 9, and 10 will be weighted more heavily than days 1, 2, 3. This will help you catch trends earlier and avoid falling for mirage trends that get you nowhere.
How Do Moving Averages Help with Gold Trading?
Moving averages define areas of support and resistance, indicate trend directions, and smooth out volume and price fluctuations. Moving averages can be used in combination to make trends clearer – further moving averages show a strong current trend, while intersecting averages confirm a change in trend. All of this information in combination helps you get in on trends early and gives you warning signs for when to get out.
Successful gold traders use moving averages to track the market and make predictions about trends. Whether using simple moving average calculations or weighted exponential moving averages, they can communicate a lot of useful information about the direction of the market.
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