Moving Average

Moving Average

Moving Average is one of the widely used indicators in trading. Traders love it because of its simplicity and effectiveness.  

In this article, we will explain what this indicator is and how to use it to lift your profit.

Moving average is the trend indicator. It takes average price figures and as a result, smooth price actions from fluctuations.

Types of the indicator.

There are 4 main types of the Moving Average that you can implement in MetaTrader. We won’t give you complicated formulas. It’s more important for you to understand the idea of each type.

Usually, traders use the Simple Moving Average. This type of the MAs shows the average of close prices for the period it considers. As a result, all prices are equal in value. For example, if we have 10-day MA, we calculate a sum of 10 close prices and divide it in 10. Every time a new close price forms, the oldest one isn’t counted anymore.

Exponential MA and Linear Weighted MA are quite similar. They calculate the latest prices with the higher coefficient. As a result, these MAs reflect price’s moves the most and gives signals faster. Be careful! These MAs give fast signals but some of them may be fake.

Smoothed MA is based on the Simple MA. It’s easy to define its major function after the first glance at its name. This MA clears price moves from fluctuations the most. This MA is the best to define the trend.

How to implement.

MA is set in MetaTrader, so you don’t need to download it. Go to “insert” – find “indicators” – go to “trend” – and you will see the Moving Average. It’s more important to apply correct settings.

Period. A period is the number of candlesticks that will be taken into consideration for calculating. The bigger period is, the smoother MA and more accurate signals will be. The smaller the period, the closer the MA will be to the price.

There is no single rule what period of the MA to use. Analyzing charts with big timeframes, traders prefer MAs with such periods as 50, 100, and 200. To trade on smaller timeframes, investors prefer small periods such as 9, 12, and 26.

Price. There are several options. It can be close, open, high, low, median, typical and weighed close prices. However, usually, traders use the close price.

Shift. This setting is used to pull the indicator forth and back in time. As a result, the MA will move up or down.

How to use.

One thing we need to tell you. MAs give delayed signals because they calculate the last close price. Take it into consideration while using them in your trading.

1. MA is a trend indicator, so we will start with a trend detection. If you want to find out whether the market is bearish or bullish, a cross will help you.

  • Golden cross.

 Golden-cross.jpg

When an MA with a smaller period crosses an MA with a bigger period bottom up, it’s a signal to buy.

  • Dead cross.

dead-cross.jpg

When an MA with a smaller period crosses an MA with a bigger period upside down, it’s a signal to sell.

2. More about the trend function. If the indicator goes down, it’s a downtrend. If the MA goes up, it’s an uptrend.

3. Moving Average is highly used as support and resistance levels. The strength of the levels depends on the period of the MA. The bigger the period, the stronger the support/resistance. The timeframe plays an important role as well. The bigger the timeframe, the stronger the MAs will be. If you compare the 200-hour MA to 200-day MA, the last one will be a stronger level and as a result, more likely the price will fluctuate near it.

Using MAs as support and resistance levels, we get a chance to determine levels to open a position. When the price breaks above the MA, it may be a signal to buy. Vice versa, a breakthrough below the MA will give a sign to sell. 

support.jpg

Tip: if the price hits the MA several times, it means that a reversal is close.

MAs and other indicators.

A great advantage of MAs is that they are not the only indicator; they are a part of other technical indicators. The most famous indicator based on MAs is MACD. You can also find MAs in such trading tools as Alligator, Bollinger Bands, Ichimoku Kinko Hyo.                                                          

We always remind traders that there is no perfect indicator that’s why it’s important to combine them to get stronger signals.

What indicators are the best in a combination with MAs?

It’s always a good idea to use candlesticks. They give strong signals of a reversal and a continuation of the trend. Other indicators that can be used are oscillators.

Remember that you need at least 2 matched signals, to start trading.

In brief: let’s generalize what you read above. Moving Average is the trend technical indicator that reflects price moves. It gives delayed signals, however, still is very useful as signals are strong. Buy when the price is above the MA and when you see a golden cross. Sell when the price is below the MA and you come across a dead cross.

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