This thread is much more to jot down my thoughts and put them in order, I do encourage discussion. I've done a thread about the use of technical tools, yet this one is a bit different, if anybody decides to pitch , just know that any technical tool which you bring up, you have to know the PURPOSE supporting the invention, what is actually computing and how is this useful on the analysis of the market.
The power of the moving average:
first of all lets start by stating what is a typical, and why it is crucial to understand the mean of a statistical information. In my view the best moving average to use is your Simple Moving Average, as another averages are made upon the intent of price prediction WMA, EMA, SMMA.... And so on.
Why do I say this? The SMA is regarded as a indior In case you go on line, and its uses are regurgitated again and again, as support advertisement resistance, or moving average cross over price prediction in trending markets right? They indie to use a 50sma and a 200 sma as traders use them and you find the identical thing. So the WMA,SMMA,EMAs were made to smooth or burden the typical as to be affected by current price quicker and not be as slow as a SMA.
My personal opinion is that train of thought is simply rubbish, the SMA is just as statistical Typical, and was thought to as a way to find the mathematical mean. Might be common sense to many experienced traders, nevertheless I took studying quotes move in order to grasp the thought, of charts and proper uses of specialized tools. For each and each newbie before you look at your high tech gadget filled platform start trading from simply the quotes and start brain storming on how to make sense of the seemingly random motion, this workout will help save you years at the learning curve.
Back to my original thought: on sample pool we have many variable information, the dispersion may be concentrated on a central point or evenly distributed, but to get a sense of what is a fair value or an imagined normal point we try to get to the average of the sample pool. I.e
lets say these are apples, and if you asked me how many apples are USUALLY about the desk, at any given day (we have 10 numbers for 10 days)
1,1,6,8,5,5,2,2,3,7 I would tell you I dont understand, anywhere from 1 to 8, but this is very brought and I am giving you a range which is not helpful if you are trying to arrive to an expected fair value.
So I say on typical 4, (1 1 6 8 5 5 2 2 3 7= 40) 40/10 days = average give and take we can expect 4 apples on a given day to be on the desk, and therefore this is the fair value, if occasionally we get 1 or sometimes 8 we can assume we had LESS or MORE apples now in connection to the mean.
What exactly does this say so much as the market? Well enjoy most of technical tools it is on no account predictive but is a way to understand what the fair market value is as to make a determination if the currency is trading at a low or high price in connection to the perceived mean.
Same goes with the euro, should ask me what was the price of the euro last month, I would say to you I dont know which day? That second? Month, What should you think about? The actual month or the days that are trading? Do you mean open, high, low, or prices? (you see I dont give you any helpful info, possibly an extremely broad range= 1.3421 to 1.4246)
or can say it had been on average 1.3743 (include all final prices and divide by 20 trading days in the month (given is much more like 21.5 trading days but mathematical exactitude isn't imperative))
so offer a take some pips on average it is safe to say that's reasonable market value, and the calculated mean.
So in the event that you sign up for the idea of volatility and mean reversion, or whatnot this is the initial starting point in understanding whether the price now is cheap relative to the typical or high viz a viz the reasonable market value.
However not everything is that easy, how do you understand is ordinary volatility or its own a change in direction? That is where bollinger introduced the notion of mathematically calculate price variations through deviations from a sensed mean we call this Bollinger Bands. Then there is the calculations of acceleration and momentum by speed of motion relative to a moving average.