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Moving averages are a very popular tool among the traders because they are a lagging indicator of the price action. Short and long term trends are easier to identify using moving averages. A moving average is an average of a predetermined number of prices such as the closing prices calculated over a number of periods like 50 candles. The higher the number of candles in the average, the smoother the line is.

Moving averages are calculated on the users specifications and can be formatted to different style of trading and time frames. For example, if you use a 90 time frame moving average, the prices of the last 90 times frames is added together and divided by 90. A moving average can be calculated based on the high, low, opening or closing price within a time frame. Since the closing price is the most important price, most traders prefer to use the closing price in calculating MAs.

There are three types of moving averages. First one is the Simple Moving Average (SMA). The second is Weighted Moving Average. The third is the Exponential Moving Average (EMA). The simple moving average as the name suggests is simply calculated by dividing the price in each time frame by the number of time frames. SMA is only a simple average. It is obtained by adding all the candles that you would like to measure. A weighted moving average gives more weight to the current prices as compared to the prices in the last few time frames.

In an exponentially smoothed moving average, the chart is calculated gradually with less emphasis on the prices in the latter time frames. Exponential moving averages are smoother as compared to the simple. EMA is obtained by exponentially smoothing the SMA. EMA pays more attention to newer candles. The EMA responds more quickly to price changes as compared to SMA. A moving average makes it easier to visualize price action without statistical noise. Instead of watching the up and down behavior of each candle, you are watching the relatively smooth moving average line.