Using indicators for technical analysis  is essential.

Some traders think that moving averages are the best indicators for forex.

Moving averages are often used on candlestick charts to indicate the average, maximum and minimum together with an upwards or downwards trend indicated by the colour green for positive and red for negative.

When you know which way the market is going you have a better idea of what it will do next.

There are diffferent types of moving averages, and the two most popular moving averages are the simple moving average and the exponental moving average.

Simple moving average

This is where the average closing points of your trade are calculated on a rolling bases. Say you want to trade an hourly basis and you want to plot an 8 point chart. Simply collect the last 8 hourly closing points and divide by 8. now to making it a moving average you move back one point and take the 8 from their. Do this three times or more to establish a trend.

Here is an example:

Period 1: 3.4  3.6  4.0  4.1  4.3  4.6  4.6  4.7 – average = 4.1625

Period 2: 3.6  4.0  4.1  4.3  4.6  4.6  4.7  5.0 – average = 4.3625

Period 3: 4.0  4.1  4.3  4.6  4.6  4.7  5.0  5.0 – average = 4.5375

You can see from this analysis that, with time period 3 being the most recent 8 hour period, even though the last two points are no longer showing any movement up or down, the simple moving average trend indicated by the average amounts is still upwards.

The other thing a simple moving average does is smooth out the underlying fluctuations in the market, which can be very erratic. The longer the time period you use for your calculations, the smoother the trend will be.

Because the forex trading charts can look very busy, the single moving average is normally plotted as a separate line at the top of the main forex chart.

Exponential moving average

This is very similar to the simple moving average only in this case, greater importance is given to the most recent prices and therefore these are given extra weight in the calculation. Using our example, The simple moving average gave equal importance to the price an hour ago and to the price 8 hours ago. Exponential moving average calculations give more weight to the recent prices in the selected time periods.

The exponential moving average is therefore more responsive to price fluctuations and would give an earlier indication of a reversal in the trend. This means that you would be able to react more quickly and take better advantage of emerging trends. There is, though, the possibility that you react too quickly only to see the trend quickly reverse back again.

It is worth using both of these indicators alongside each other to start with to see which works best for you. You will find that you will get the hang of using these indicators quickly and easily.