A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.
For example, to calculate a 21-day moving average of Geo2 Ltd: First, we would add up Geo2 Ltd’s closing prices for the preceding 21 days. Next, we would divide that sum by 21; this would give us the average price of Geo2 Ltd over the preceding 21 days. We would plot this average price on the chart. The following day (tomorrow) we would do the same calculations: add up the previous 21 days’ closing prices, divide by 21, and plot the resulting figure on the chart
The calculation of the SMA (Simple Moving Average) goes the following way: the currency closing prices taken for some period of time are summed and divided by the amount of these periods. Generally speaking, the average price of the certain period is represented by SMA.
The volatility of the forex market is much more smoothed at the long periods of time due to the equal weight given for the daily price by SMA. Only the long-term trends bay me seen out of the long-term averages as far as any insignificant fluctuations get smoothed. For finding put short-term trends the short-term averages are taken, however they still give the long term expense.
The prices are mostly located close to the moving average but still aside from it. The moving average changes following the trend changes giving the additional data of the trend strength taking the slope steepness as its basis.