Moving averages (MAs) are in fact so simple and easy to use that most traders tend to ignore them. The most obvious reason cited is the fact that MAs tend to lag the price action. What this means is that MAs are lagging indicators. How do we calculate MAs?

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MAs are used dynamically to calculate the average price of a currency pair or for that matter a security over a defined number of past periods. For example, on a daily chart, a 20 period moving average adds the daily close price for the last 20 days and divides it by 20. In simple terms, an MA is calculating the mean or average price for the last 20 days. When we calculate this price daily, we get a smooth MA dynamic line that tends to follow the price action.

Some trading systems use more than two MAs. It can three MAs or even more. The crossovers between these MAs is considered to be important buy and sell signals. Now MAs work very well in a trending market. However, they lose their effectiveness in a ranging market where they tend to whipsaw a lot. Price choppiness during a sideways market make result in false trading signals being generated by these MAs.

Whatever, always know that MAs are one of the most simple yet the most potent technical indicators that are used by traders daily in their trading!