First, let’s start with an exponential moving average. When you want a moving average that will respond to the price action rather quickly, then a short period EMA is the best way to go. These can help you catch trends very early, which will result in higher profit. In fact, the earlier you catch a trend, the longer you can ride it and rake in those profits!
The downside to the choppy moving average is that you might get faked out. Because the moving average responds so quickly to the price, you might think a trend is forming when in actuality; it could just be a price spike.
With a simple moving average, the opposite is true. When you want a moving average that is smoother and slower to respond to price action, then a longer period SMA is the best way to go.
Although it is slow to respond to the price action, it will save you from many fake outs. The downside is that it might delay you too long, and you might miss out on a good trade.
So which one is better? It’s really up to you to decide. Many traders plot several different moving averages to give them both sides of the story. They might use a longer period simple moving average to find out what the overall trend is, and then use a shorter period exponential moving average to find a good time to enter a trade.
In fact, many trading systems are built around what is called “Moving Average Crossovers”. Later in this course, we will give you an example of how you can use moving averages as part of your trading system.
Time for recess! Go find a chart and start playing with some moving averages. Try out different types and look at different periods. In time, you will find out which moving averages work best for you. Class dismissed!
quinta-feira, 21 de fevereiro de 2008
Exponential Moving Average (EMA)
![](http://bp1.blogger.com/_dURrNu6_cZE/R72w08YDc5I/AAAAAAAAAAc/1BeN-TDxX64/s320/sma-vs-ema.gif)
Although the simple moving average is a great tool, there is one major flaw associated with it. Simple moving averages are very susceptible to spikes. Let me show you an example of what I mean:
Let’s say we plot a 5 period SMA on the daily chart of the EUR/USD and the closing prices for the last 5 days are as follows:
Day 1: 1.2345Day 2: 1.2350Day 3: 1.2360Day 4: 1.2365Day 5: 1.2370
The simple moving average would be calculated as(1.2345+1.2350+1.2360+1.2365+1.2370)/5= 1.2358
Simple enough right?
Well what if Day 2’s price was 1.2300? The result of the simple moving average would be a lot lower and it would give you the notion that the price was actually going down, when in reality, Day 2 could have just been a one time event (maybe interest rates decreasing).
Let’s say we plot a 5 period SMA on the daily chart of the EUR/USD and the closing prices for the last 5 days are as follows:
Day 1: 1.2345Day 2: 1.2350Day 3: 1.2360Day 4: 1.2365Day 5: 1.2370
The simple moving average would be calculated as(1.2345+1.2350+1.2360+1.2365+1.2370)/5= 1.2358
Simple enough right?
Well what if Day 2’s price was 1.2300? The result of the simple moving average would be a lot lower and it would give you the notion that the price was actually going down, when in reality, Day 2 could have just been a one time event (maybe interest rates decreasing).
The point I’m trying to make is that sometimes the simple moving average might be too simple. If only there was a way that you could filter out these spikes so that you wouldn’t get the wrong idea. Hmmmm…I wonder….Wait a minute……Yep, there is a way!
It’s called the Exponential Moving Average!
Exponential moving averages (EMA) give more weight to the most recent periods. In our example above, the EMA would put more weight on Days 3-5, which means that the spike on Day 2 would be of lesser value and wouldn’t affect the moving average as much. What this does is it puts more emphasis on what traders are doing NOW.
It’s called the Exponential Moving Average!
Exponential moving averages (EMA) give more weight to the most recent periods. In our example above, the EMA would put more weight on Days 3-5, which means that the spike on Day 2 would be of lesser value and wouldn’t affect the moving average as much. What this does is it puts more emphasis on what traders are doing NOW.
When trading, it is far more important to see what traders are doing now rather than what they did last week or last month.
Simple Moving Average
![](http://bp1.blogger.com/_dURrNu6_cZE/R72v28YDc4I/AAAAAAAAAAU/ctF-6IynFsc/s320/moving-averagesB.gif)
A simple moving average is the simplest type of moving average (DUH!). Basically, a simple moving average is calculated by adding up the last “X” period’s closing prices and then dividing that number by X. Confused??? Allow me to clarify.
If you plotted a 5 period simple moving average on a 1 hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5. Voila! You have your simple moving average.
If you were to plot a 5 period simple moving average on a 10 minute chart, you would add up the closing prices of the last 50 minutes and then divide that number by 5.
If you were to plot a 5 period simple moving average on a 30 minute chart, you would add up the closing prices of the last 150 minutes and then divide that number by 5.
If you were to plot the 5 period simple moving average on the a 4 hr. chart………………..OK OK, I think you get the picture! Let’s move on.
Most charting packages will do all the calculations for you. The reason we just bored you (yawn!) with how to calculate a simple moving average is because it is important that you understand how the moving averages are calculated. If you understand how each moving average is calculated, you can make your own decision as to which type is better for you.
Just like any indicator out there, moving averages operate with a delay. Because you are taking the averages of the price, you are really only seeing a “forecast” of the future price and not a concrete view of the future. Disclaimer: Moving averages will not turn you into Ms. Cleo the psychic!
If you plotted a 5 period simple moving average on a 1 hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5. Voila! You have your simple moving average.
If you were to plot a 5 period simple moving average on a 10 minute chart, you would add up the closing prices of the last 50 minutes and then divide that number by 5.
If you were to plot a 5 period simple moving average on a 30 minute chart, you would add up the closing prices of the last 150 minutes and then divide that number by 5.
If you were to plot the 5 period simple moving average on the a 4 hr. chart………………..OK OK, I think you get the picture! Let’s move on.
Most charting packages will do all the calculations for you. The reason we just bored you (yawn!) with how to calculate a simple moving average is because it is important that you understand how the moving averages are calculated. If you understand how each moving average is calculated, you can make your own decision as to which type is better for you.
Just like any indicator out there, moving averages operate with a delay. Because you are taking the averages of the price, you are really only seeing a “forecast” of the future price and not a concrete view of the future. Disclaimer: Moving averages will not turn you into Ms. Cleo the psychic!
On the previous chart, you can see 3 different SMAs. As you can see, the longer the SMA period is, the more it lags behind the price. Notice how the 62 SMA is farther away from the current price than the 30 and 5 SMA. This is because with the 62 SMA, you are adding up the closing prices of the last 62 periods and dividing it by 62. The higher the number period you use, the slower it is to react to the price movement.
The SMA’s in this chart show you the overall sentiment of the market at this point in time. Instead of just looking at the current price of the market, the moving averages give us a broader view, and we can now make a general prediction of its future price.
Moving Averages
![](http://bp2.blogger.com/_dURrNu6_cZE/R72unMYDc3I/AAAAAAAAAAM/bFh3mfzaTu4/s320/moving-average-small.gif)
A moving average is simply a way to smooth out price action over time. By “moving average”, we mean that you are taking the average closing price of a currency for the last ‘X’ number of periods.
Like every indicator, a moving average indicator is used to help us forecast future prices. By looking at the slope of the moving average, you can make general predictions as to where the price will go.
As we said, moving averages smooth out price action. There are different types of moving averages, and each of them has their own level of “smoothness”. Generally, the smoother the moving average, the slower it is to react to the price movement. The choppier the moving average, the quicker it is to react to the price movement.
As we said, moving averages smooth out price action. There are different types of moving averages, and each of them has their own level of “smoothness”. Generally, the smoother the moving average, the slower it is to react to the price movement. The choppier the moving average, the quicker it is to react to the price movement.
segunda-feira, 18 de fevereiro de 2008
The best investment you can ever make is in yourself.
Don’t spend your money on a company that promises huge returns; even if they show you their track record. It might look pretty and colorful; and I’m sure that the line on the graph that seems to keep going higher and higher makes it look like there is no way you could lose money, but don’t let them fool you. In fact, I could take my broker statement right now, touch it up with Photoshop and voila! – I have now just become the most successful trader on the planet. Pretty impressive huh? I know I’m laying it on pretty thick, but I really want to prevent you from falling into any traps. Instead of giving your hard earned money to someone else, you could put that money aside into a trading account and take the time to educate yourself.
Notice that I didn’t say you should put your money into a trading account and start trading.
Keep that money in your account and gradually add to it as you continue to learn. Before you know it, your account size will be bigger than you realized, and to top it off, you’ll have a wealth of Forex education under your “traders” belt.
So remember, Forex scams DO exist. Be wary of them and hold onto your money. The good news is that there ARE legitimate Forex companies out there. Make sure you do thorough research on a company if you are thinking about giving them a shot. Ask other traders on the forums if they've had experiences with them. There is a wealth of information on the Internet so do your homework and you’ll be just fine.
Notice that I didn’t say you should put your money into a trading account and start trading.
Keep that money in your account and gradually add to it as you continue to learn. Before you know it, your account size will be bigger than you realized, and to top it off, you’ll have a wealth of Forex education under your “traders” belt.
So remember, Forex scams DO exist. Be wary of them and hold onto your money. The good news is that there ARE legitimate Forex companies out there. Make sure you do thorough research on a company if you are thinking about giving them a shot. Ask other traders on the forums if they've had experiences with them. There is a wealth of information on the Internet so do your homework and you’ll be just fine.
Forex Scams
One of the first things you must learn about the Forex market is that although it is enjoyable and exciting, there is no magic button that will instantly turn your pennies into millions of dollars. You may have already heard about Forex scams that are filling the marketplace. These companies purposely mislead people into thinking that making money in the Forex is easy and that they have found the “Magic Solution” to raking in booku bucks with a simple click of a button.
Sadly, the number of Forex scams is rising. The Commodities Futures Trading Commission (CFTC) released a report citing that in recent years, they have seen a sharp increase in the rise of Foreign Exchange scams. The CFTC warns consumers to be cautious of sales solicitations in newspapers, radio or television. You’ve probably even seen some of these companies. I hear about them all the time from people whenever I try to explain the Forex. The first thing they say is that they think the Forex is a scam. That makes me so angry! The Forex is a tremendous investment opportunity for people and because of these scammers, they miss out on a good way to make money.
The truth is that no matter how you slice or dice it, education is the only fool proof way to consistently make money in the Foreign Exchange. Even after you finish reading through BabyPips.com, your journey as a FX trader is only the beginning. I have never met a successful Forex trader who stopped learning. There is always something new to learn and you must actively seek out as much information as you can.
Sadly, the number of Forex scams is rising. The Commodities Futures Trading Commission (CFTC) released a report citing that in recent years, they have seen a sharp increase in the rise of Foreign Exchange scams. The CFTC warns consumers to be cautious of sales solicitations in newspapers, radio or television. You’ve probably even seen some of these companies. I hear about them all the time from people whenever I try to explain the Forex. The first thing they say is that they think the Forex is a scam. That makes me so angry! The Forex is a tremendous investment opportunity for people and because of these scammers, they miss out on a good way to make money.
The truth is that no matter how you slice or dice it, education is the only fool proof way to consistently make money in the Foreign Exchange. Even after you finish reading through BabyPips.com, your journey as a FX trader is only the beginning. I have never met a successful Forex trader who stopped learning. There is always something new to learn and you must actively seek out as much information as you can.
quinta-feira, 14 de fevereiro de 2008
Money Management
This section is one of the most important sections you will ever read about trading.
Why is it important? Well, we are in the business of making money, and in order to make money we have to learn how to manage it. Ironically, this is one of the most overlooked areas in trading. Many traders are just anxious to get right into trading with no regards to their total account size. They simply determine how much they can stomach to lose in a single trade and hit the “trade” button. There’s a term for this type of investing….it’s called GAMBLING!
When you trade without money management rules, you are in fact gambling. You are not looking at the long term return on your investment. Instead you are only looking for that “jackpot”. Money management rules will not only protect us, but they will make us very profitable in the long run. If you don’t believe me, and you think that “gambling” is the way to get rich, then consider this example:
People go to Las Vegas all the time to gamble their money in hopes to win a big jackpot, and in fact, many people do win. So how in the world, are casino’s still making money if many individuals are winning jackpots? The answer is that while even though people win jackpots, in the long run, casino’s are still profitable because they rake in more money from the people that don’t win. That is where the term “the house always wins” comes from.
The truth is that casinos are just very rich statisticians. They know that in the long run, they will be the ones making the money—not the gamblers. Even if Joe Schmoe wins $100,000 jackpot in a slot machine, the casinos know that there will be 100 more gamblers who WON’T win that jackpot and the money will go right back in their pockets.
This is a classic example of how statisticians make money over gamblers. Even though both lose money, the statistician, or casino in this case, knows how to control their losses. Essentially, this is how money management works.If you learn how to control your losses, you will have a chance at being profitable.
You want to be the rich statistician…NOT the gambler because in the long run, you want to “always be the winner.”
So how do you become this rich statistician instead of a loser?
Why is it important? Well, we are in the business of making money, and in order to make money we have to learn how to manage it. Ironically, this is one of the most overlooked areas in trading. Many traders are just anxious to get right into trading with no regards to their total account size. They simply determine how much they can stomach to lose in a single trade and hit the “trade” button. There’s a term for this type of investing….it’s called GAMBLING!
When you trade without money management rules, you are in fact gambling. You are not looking at the long term return on your investment. Instead you are only looking for that “jackpot”. Money management rules will not only protect us, but they will make us very profitable in the long run. If you don’t believe me, and you think that “gambling” is the way to get rich, then consider this example:
People go to Las Vegas all the time to gamble their money in hopes to win a big jackpot, and in fact, many people do win. So how in the world, are casino’s still making money if many individuals are winning jackpots? The answer is that while even though people win jackpots, in the long run, casino’s are still profitable because they rake in more money from the people that don’t win. That is where the term “the house always wins” comes from.
The truth is that casinos are just very rich statisticians. They know that in the long run, they will be the ones making the money—not the gamblers. Even if Joe Schmoe wins $100,000 jackpot in a slot machine, the casinos know that there will be 100 more gamblers who WON’T win that jackpot and the money will go right back in their pockets.
This is a classic example of how statisticians make money over gamblers. Even though both lose money, the statistician, or casino in this case, knows how to control their losses. Essentially, this is how money management works.If you learn how to control your losses, you will have a chance at being profitable.
You want to be the rich statistician…NOT the gambler because in the long run, you want to “always be the winner.”
So how do you become this rich statistician instead of a loser?
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