What are Moving Averages?

Babypips Elementary - Grade 4

What is a moving average (MA)?

A technical indicator that smooths out price fluctuations by calculating the average closing price of a currency pair over a specific number of past periods.

Why are moving averages used instead of just looking at raw price?

Because price movements are choppy and zigzag; moving averages help filter out 'noise' to reveal the underlying trend direction.

What is a 'chart overlay' in technical analysis?

An indicator like a moving average that is plotted directly on top of the price chart rather than in a separate window below.

How does the 'length' of a moving average affect it?

The length (number of periods) determines how many data points are included in the average; shorter lengths react faster, longer lengths are smoother but slower.

What happens to a moving average as its length increases?

It becomes smoother and slower to react to price changes because more data points dilute the impact of any single price.

What happens to a moving average as its length decreases?

It becomes choppier and quicker to react to price changes because fewer data points are averaged.

What type of indicator is a moving average?

A trend-following (lagging) indicator that defines the current trend direction after the fact.

Do moving averages predict future price direction?

No, they do not predict; they define the current direction with a lag based on past price data.

What are the two main types of moving averages?

Simple Moving Average (SMA) and Exponential Moving Average (EMA).

Why is it important to choose the proper moving average length?

To balance responsiveness and smoothness based on your trading timeframe, avoiding too much noise or excessive lag