A Moving Average is a good way to measure momentum and to confirm trends and determine support and resistance areas.
Moving Average is a lagging indicator and reacts to events that have occurred.
Not for predictive indicators but interpretations for confirmation and analysis.
Moving Average with several types is a simple but multi-functional indicator. This indicator is available on all trading platforms and even becomes the default indicator installed on the chart.
Many traders take advantage of the Moving Average function because this is the indicator that they usually know for the first time.
Many beginners learn this indicator for the first time too since they know online trading.
Although it looks simple, behind its simple appearance.
Actually, a lot of information can we take from a line of Moving Average indicators, or a combination of several Moving Average lines.
After you learn the moving average indicator, you can apply it to STP, ECN, or TenkoFX Crypto accounts.
This simple indicator is still many traders who use and believe that this is one of the main indicators in conducting market analysis and as a powerful trading tool.
Types of Moving Average
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Moving Average is an indicator in technical analysis which is quite popular.
There are some versions of Moving Average that are used as indicators of Technical Analysis, for example:
- Simple Moving Average (SMA)
- Weighted Moving Average (WMA)
- Exponential Moving Average (EMA)
How to use all Moving Averages is the same.
But what distinguishes from all types of MA is the average calculation pattern that weighs a certain period value is considered more weighty.
For example, if the SMA only uses the ordinary average, WMA and EMA use a weighting system.
So that this weighting can produce a different average value.
So, it can be concluded that the difference is in the level of sensitivity that each of these indicators gives to the prices.
The picture above shows a comparison of the three types of MA in the same period.
From three types of MAs that are most sensitive to price movements are WMA, followed by EMA then the last is SMA.
Because of this nature, WMA and EMA are often used for short-term trading, while SMA is used by long-term investors.
Simple Moving Average
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Simple Moving Average (SMA) is arithmetic Moving Average
By calculating the closing price of a stock for a number of time periods.
And then divided by a number of time periods.
In SMA, the data entered is the same weight, this means that every day in the data set has the same level of importance and the same weight.
Because every day is new, the oldest data points are discarded and the latest is added.
SMA indicators display visual lines formulated from simple average calculations.
The calculation only inputs a list of prices (from the highest, lowest, opening or closing prices).
Then divided by how long the period is determined, for example like the following example:
Weighted Moving Average
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WMA is more or less similar to SMA, except in terms of giving weight to the most recent data.
Just like SMA, WMA discards the oldest closing price every day and adds the latest.
WMA multiplies factors to give different weights to data at different times.
Within a number of (n) days, the most recent day’s WMA has a weight of (n), the second most recent (n) – 1, etc., until it weighs to one.
In contrast to the SMA indicator, EMA uses a formulation where the price of the last candlestick is more influential.
The purpose of the formulation is to provide a more sensitive EMA line for price changes.
Exponential Moving Average
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Exponential Moving Average (EMA) is a type of MA that infinitely filters data, where old data is not discarded but is only exponentially reduced, but its weight is not to zero.
EMA is similar to WMA in terms of distinguishing data weights between previous and most recent data, with this calculation, EMA and WMA are both more sensitive to stock price movements compared to SMA.
Use of Moving Average
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The most common application of MA is to identify the direction of the trend and to determine support levels and resistance.
Refers from the function itself, we can divide the MA function into:
- Identifying price trends.
- Knowing the trend reversal.
- Determine support levels and resistance.
Identifying Price Trends
To find out the direction of price trends, simply you can see the position of the MA against the instrument price, whether above or below it.
In principle, if the price is above the MA, then the price is in an uptrend, whereas if the price is below the MA, the price is in a downtrend.
Another way to identify trends is to use two or more different MAs, for example, MA 5, MA 20 and MA 60.
The position of the MA is shorter than the long MA, whether above or below it.
The same principle, if MA 5 (short term) is above MA 20 (long term), then the price is in an upward trend, conversely, if MA 5 is below MA 20, then the price is in a downtrend.
Identifying the Trend Reversal
To determine the point of reversal trend, simply you can see when the price through the Moving Average.
If the MA is broken through the short-term MA period, then the reversal is even for the short term. More details can be seen in the following picture.
If the price crosses upwards, it indicates a reversal of the direction becomes a bullish trend, on the contrary.
If the price crosses downwards indicates the reversal of the direction becomes a bearish trend.
Another way to identify reversal of a trend can also be seen from the intersection of 2 or more types of MA.
If MA 5 (short term) crosses above MA 20 (long term).
Indicates a reversal of direction becomes a bullish trend (up).
Conversely, if MA 5 crossing below MA 20, indicates a reversal of direction becomes a bearish trend (down).
Determine Support Levels and Resistance
Other uses of the MA are as a psychological level for the support and resistance of trading instrument prices.
When prices close to the MA line, often the price will bounce back so as if the MA acts as a barrier to price movements.
But if the price breaks through the MA line, it is said to be a reversal signal.
MA indicator lines generally move rather slowly (lagging) following the latest price changes.
So that at a glance the line looks away from the current price point.
Because of this, the MA indicator is more effectively used as a boundary line of support and resistance, or a marker of price reflection.
The example above, MA 20 acts as a resistance that inhibits prices and bounces back.
200 moving average strategy forex
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200 forex moving average strategy, this is a forex strategy that uses a 200-period moving average indicator.
Why many traders choose the number 200 for this strategy, is because the daily price range of 200 is a good range to identify long-term trends.
Basically, MA 200 represents the closing price movement during the last 200 days.
This is for forex analysis, but it can also be for stock prices.
How to read this indicator is very easy.
If the price is below the MA200 line the indication that the trend is bearish.
And vice versa if the price is above the MA200 the trend is bullish.
You can also pay attention to the direction of the MA200 line if it is directed down means it is bearish.
And if it is directed upwards it means that it is currently bullish.
But if it is horizontal it means that it will be possible to reverse the trend.
MA 200 as support and resistance
From the example above you can see that the MA 200 line functions as resistance in a bearish trend.
You can notice when the price closes to the MA200 line then a trend reversal will occur.
Thus it can be concluded that the MA200 indicator is very good as a support and resistance indicator for the long term, usually, traders use this at daily timeframes.
The use of MA 200 indicators has been widespread and is often used in conjunction with the application of fundamental analysis.
For example, in the financial crisis, the EURUSD currency pair declined by more than 3500 pips (or around 21.58%) in just 3½ months.
The data was released by “The Troubled Asset Relieve Program (TARP)” on October 14, 2008
However, the movement finally in a reversal, due to the anticipation from the Ministry of Finance, by purchasing bonds.
The market also began to face a significant increase. Where, EURUSD then moved up, almost reaching around 2,400 pips (19.35%) from lows.
MA 200 with MA 50
Many traders also use the MA 200 along with other MA indicators to show the strength of the Trend, for example, with MA 50.
Moving Average 50 (MA 50) with MA200 to determine the Trend of the market.
When MA50 crosses MA200 from top to bottom (Death Cross) then it can be said that overall Trend is Bearish.
And vice versa if MA50 succeeds in crossing MA200 from bottom to top (Golden Cross) then overall Trend is Bullish.
Moving average and stochastic strategy
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Is it possible to combine the Moving Average indicator with Stochastic?
Forex trading is like the art of trading, one trader is free to use the strategies and indicators that they think are best.
Some traders have combined to use the MA and stochastic indicators.
Moving averages to determine trends that are ongoing or that are happening in the market.
Moving Average can also function as support and resistance, the term is dynamic support and resistance (dynamic support and Resistance)
The Stochastic Oscillator is one of the indicators that help to find good momentum to determine entry points.
Sell signals often appear when the stochastic is in the overbought area while a buy signal often appears when the stochastic is in the oversold area
Combining Moving Average and Stochastic Oscillator
Basic indicator usage
- Moving Average as an indicator of the trend is used as a determinant of the direction of price movements.
- The intersection between prices with MA or with different MA periods as a signal for position entry.
- MA lines as support and resistance as the second option in making entry positions.
- Stochastic Oscillator as a confirmation of the signal that appears
Rules for install Moving Average (MA) and Stochastic Oscillators
- The use of a minimum of 1 hour (H1) time frame is better.
- Setting an MA with periods 20 and 50
- Setting the stochastic oscillator with the default setup.
Rules the uptrend
- Make sure both MAs are pointing up
- Wait for the price to enter (correction) to the second area of the MA
- Look for buy signal confirmation (Buy) on the stochastic oscillator.
- The exit rule you can choose if the price falls and closes below the MA 50 or you can place a stop-loss slightly below the nearest support.
- Take Profit (TP) targets, they can be placed slightly below the nearest resistance (Distance 5-15 pips from the resistance).
Rules during a downtrend
- Make sure that both MAs are pointing down.
- Wait until the price enters (pull-back) to the area between the two MA.
- Look for confirmation of a sell signal on the stochastic oscillator.
- For the exit rules a, if the price rises and closes above the MA50 or you can put a stop-loss slightly above the resistance.
- Take Profit (TP) you can place above the closest support (distance 5-1pips from the support).
This strategy will not work well in the sideway market conditions, therefore we must really pay attention to the condition of its MA.
If the MA moves flat, it is not recommended to use this strategy.
Moving average is an indicator that was first studied by many beginners.
This indicator can be combined with other indicators, be it RSI or stochastic, and other indicators.
In using this indicator you have to pay attention to risk management.
Because there are no perfect indicators, with risk management, any strategy will last longer.
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