What is the moving average? This is one of the analysis tools for forex, stocks and derivative products.
As the most popular technical method among traders, many of them use the MA as a market analysis tool.
MA is an indicator in technical analysis that helps “smooth” price movements by removing noise from price fluctuations.
This indicator includes a Lagging indicator because it is based on prices that have occurred in the past.
This is a simple method of reading price movements over time.
Moving average means that this indicator uses the average closing price of a currency pair for a certain time period.
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Basic understanding of moving averages
MA is one of the simple business forecasting methods and is often used to estimate future conditions using a collection of past data (historical data).
The time period of data collection can be in the form of Annual, Monthly, Weekly or even Daily.
This indicator for the Forecasting Method many traders use in business forecasting.
Such as forecasting market demand, technical analysis of stock and forex movements as well as estimating business trends in the future.
If applied to the price chart in the forex trading software, the indicator MA will look like this:
Like the indicators in general, almost trade use MA to guide us to read the direction of price movements.
By monitoring the interaction between the MA line and the candlestick, we can examine the potential in which direction the next trend will go.
Better use MA method to calculate data that is stable or data that does not fluctuate sharply (data that changes up and down very dramatically)
That’s because the data in each period have the same weight so they cannot represent a specific period that is specific from the data of the last period.
Which is usually rated as the best data in describing the current conditions.
The MA formula is as follows:
MA = ΣX / Number of Periods
- MA = Moving Average
- ΣX = Overall Sum of all time period data calculated
- Number of Periods = Total of moving average periods
Or can be written with
MA = (n1 + n2 + n3 + …) / n
- MA = Moving Average
- n1 = first period data
- n2 = second period data
- n3 = third-period data and so on
- n =Total of moving average periods
Kinds of Moving Average
Please take a look at the first image above.
The MA line (colored blue) in the image above shows the calculation of the average value of some previous Candlestick bars.
In addition to Closing Prices, some trading terminals provide options to calculate the average opening price (Open), the highest price (High), the lowest price (Low) and the middle price (Median).
This option will appear when you install the MA indicator in the trading software, as below:
By looking at the slope of the MA, you can better determine the direction of a potential market trend.
Moving averages, smooth out price action.
There are various types of MA and each has its own “smoothness” level.
In general, the finer the MA, the slower it reacts to price movements.
The rougher the MA, the faster it reacts to price movements.
To get smoother MA, you need to get a closing price on average over a longer period of time.
How to choose a good setting period of the Moving Average
The number of periods for calculating moving averages influences how the moving averages are displayed on a price chart.
The shorter the period, the less sum of data included in the calculation of moving averages, meaning that the closer the moving average remains to the current price.
That will reduce its function and perhaps offer less insight into overall trends than current prices.
The longer the period, the more data that is included in the calculation of moving averages, which means that fewer single prices can affect the overall average.
If there is too much data, price fluctuations may become “too smooth” and you might not be able to detect any trends.
Whatever the conditions may be difficult to recognize if the price direction will change in the near future.
Therefore, it is important to use for a long period, this will provide the appropriate level of price detail for your trading period.
Type of indicator
Maybe you want to try it right away to apply it in your charting.
But first, we need to explain to you the two common types of moving averages that many traders use.
- Simple Moving Average
- Exponential Moving Average
Actually there is still one other type of moving average, Weighted Moving Average.
But traders rarely use this and mostly for stock analysis.
For detail learning later, we will be discussing one by one from the two type Moving Average
How to attached Moving Average on the Platform
Maybe you are a user of Metatrader 4, yes this is a popular trading platform and many brokers offer this platform because of its complete features, included TenkoFX also use this platform.
To attach the Moving Average indicator the steps are very easy, just click Insert –> Indicators –> Trend –> Moving Average.
After that, a new window will appear and you can choose the type of MA, set the period, apply to short of price.
And you can set will be applied in certain timeframes, whether all timeframes or specific timeframes only.
Moving averages have several functions but the most widely applied in market analysis is to identify the direction of the trend and to determine support and resistance levels.
While the overall function of the MA indicator we can divide the function into:
- Identify price trends
- Identify the trend reversal.
- Determine support levels and resistance.
MA indicators are popular and commonly used indicators by traders, but it is unknown who first discovered this indicator.
There are also various ways to use this indicator, some even use a lot of moving averages in a price chart that displays a moving average line that resembles a rainbow.
Because this indicator is a lagging indicator so maybe the predictions produced by this indicator do not guarantee 100% perfect.
And some traders also not only use one Moving Average indicator to determine when to enter the market.
But some also try to combine it with other indicators that have different functions, for example with a stochastic that functions to find overbought and oversold areas.
Generally, trader use this indicator to analyze in the forex market but also in the crypto market some trade use it
Thus the introduction of moving average indicators, and in the next chapter we will discuss the Simple Moving Average, then also the Exponential Moving Average, stay tune with Tenkofx.co.za.