Moving Average (MA) Is the most famous and long-standing indicator that has ever been used in trading in the financial markets.
They write that it was first used for calculations during the Second World War. The Moving Average authors are Richard Donchian (Richard Donchian) and J. M. Hirst (JM Hurst).
Today, there are several main types of moving averages that you can find in any trading terminal and analytical program, as well as a lot of filters written using a similar algorithm or based on a moving average.
Moving Average (МА) – a moving average following the price movement. The essence of this forex indicator is to determine the direction of the trend and to smooth it. When calculating movings, the mathematical averaging of the price of any instrument for the selected period is used.
Moving Average Formula
A simple or arithmetic moving average is calculated as the sum of the closing prices of an asset for a specified number of periods or candles (for example, 9 or 26 days), divided by the number of periods.
SMA = SUM (CLOSE (i), N) / N, Where:
- SUM – amount;
- CLOSE (i) – the closing price of the current period;
- N is the number of calculation periods.
Moving average types
There are different types of Moving Average indicator. For technical analysis of the market, moving averages such as simple, exponential, smoothed and weighted are used.
- Simple Moving Average (simple moving average) is the sum of the closing prices of any instrument for a specified number of unit periods, divided by the number of these periods. This is the most basic indicator that simply calculates the average value for the number of bars, not taking into account the history range. Therefore, such a moving is considered to be delayed.
- Corrects the situation Exponential Moving Average (exponential moving), which gives more weight to the bars that are closer to the current price. The exponential moving average adds a certain fraction of the current closing price to the previous value of the moving average, remind the experts of the fortrader.org magazine. In calculating the smoothed average, more weight is also given to the market closing price. This is the most popular version of the moving average – it is not as lagging or as sharp as WMA.
- Linear Weighted Moving Average) Is the most active indicator of the family. It reacts the fastest to price changes, so it gives a lot of false signals. Traders don’t usually use it.
More about indicator calculations
Moving average parameters
Moving average period
The period is the most important of the parameters of the moving average indicator, of any type. It shows how many bars are taken into account. The higher the value, the smoother the indicator line will be.
Small periods It is good to use the moving average on low timeframes, because they take into account the situation “here and now” and allow the trader to react quickly. But such a filter can give a lot of false signals.
If a period is too long, then it will be very late and display a long history, which may no longer be relevant. This indicator is more often used as a long-term support or resistance level.
Most often, moving averages are used in sets that reflect different periods of the market. The most popular Moving average periods are:
- For short-term trading – 6, 9, 13, 21, 26;
- For medium-term trading – 30, 50, 62;
- For long-term trading – 100, 144, 200.
These numbers represent important numbers of days in a year.
Apply to …
Another important parameter that can change the type of the moving average, “apply to …” – the price of opening, closing and other calculated bars. There are many options, but they do not particularly strongly affect the display of the indicator. Perhaps this parameter can play some role in scalping, but in long-term trading it is unlikely. The most popular forex method is close.
How to trade with the Moving Average
The moving average is a trend indicator, therefore MA based trading strategies primarily trendy. Traders come up with different signals, but there are three main ones.
- General indicator direction shows the current trend. Depending on the period, the trend is short-term, medium-term or long-term. The moving average looks upwards – an upward trend, downwards – a downtrend, it is located horizontally – a flat.
- Intersection of moving averages with different periods… The signal depends on a moving average with a shorter period: if it crosses the second line from bottom to top, then we have a buy signal, and from top to bottom – to sell.
- Sliders as support and resistance… We said above that MA with long periods are most suitable for this role. A breakdown of the line is considered a signal in the direction of the breakdown. It is important to be very scrupulous about the selection of the indicator period – it can be different for each asset.
And of course, the Moving Average indicator is most often used for technical analysis in conjunction with other indicators and oscillators.
Proprietary indicators based on a moving average
In fact, the moving average is so popular in financial market trading that it is used all over the place. There are many indicators built on its basis, as well as analogs that give signals a little earlier than the traditional indicator. Here we have collected only a part of the Moving Average variants we have, and we will update the list. Experiment and offer us your options for effective sliding.
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