Moving Average Indicator and its Particularities
Thirty Eighth session of Forex Training
Welcome back to Forex professional training in financial markets.
Moving Average Indicator and its particularities will be explained in this session.
Moving Average Indicator
Moving Average is the average of a price in a certain number of timeframes which can be customized by traders.
Moving average determined with lower number of timeframes would have faster movement, while the more timeframes would slow down MA displacement since there is more data calculated in the average.
MA is classified into 4 types: Simple, Exponential, Smooth and Linear-Weighted Moving Average.
SMA or Simple Moving Average can be derived from the summation of price data divided by the number of data inserted.
EMA or Exponential Moving Average can be calculated by the summation of each price data multiplied by its exponential amount and divided by the number of data inserted.
It can be clarified by considering the importance of each data based on its novelty.
The latest news have more significant effect on a market comparing to earlier newspapers. It has more rapid movement rather than the SMA.
SMMA or Smooth Moving Average is like EMA, but with a longer period of time.
Due to a longer period, SMMA has more gentle movement rather than the EMA.
LWMA or Linear Weighted Moving Average can be calculated through the summation of prices, which is multiplied by its certain weight, then divided by the number of prices inserted.
The maximum weight, which is multiplied by the most recent price, is the number of prices inserted into the LWMA.
Weight of each price will be deducted from the number of timeframes away from the latest price, so the earliest timeframe will be multiplied by 1.
The relation between SMA and a market price or another SMA type will be as follows:
- Price and SMA: If a market price is under SMA, then Sell order would be more appropriate. If a market price is above SMA, then a price trend would be an upward one.
- Price with 2 SMAs, SMA2 > SMA1: If a price is under SMA1 and SMA2 is above the SMA1, then a trader can place a Sell order. If a price is over SMA1 while SMA1 is higher than SMA2, then an upward trend would be more probable.
- Price with 3 SMAs, SMA3>SMA2 > SMA1: If a price is under SMA1 while SMA3 is the highest one and SMA2 is over SMA1, then trend would proceed downward. If a price is higher than all of them and SMA3 is the indicator, while SMA1 is above SMA2, then an uptrend would be more presumptive.
On MT4, a trader can import MA indicator into the desired chart from a Trend section of an Indicator list in the top toolbar.
Moving Average window will be opened in which MA properties can be modified.
A Trader can specify the preferred number of periods in the Parameters tab.
The More number of periods would slow down the pace of MA trend. A Trader can determine the MA mode from the MA method.
Trader can define price inference spot of each candle by “Apply to” option.
For instance, a trader can place a Simple Moving Average with a period amount of 8 and a red colour.
Each point of MA is calculated by the summation of 8 consecutive earlier market prices divided by 8.
As mentioned before, if a price is above SMA, then a trader can place a Buy order and vice versa.
Trader can place another SMA to have more reliable indicators.
Another SMA can have 13 periods with blue colour, thus there are two SMA on this chart with different movements.
If red line is higher than the blue line and price is higher than the red line, then an upward trend is more probable.
There is a spot where a trader could place a Buy order that proceeded toward 5771 pips higher point.
If a price goes under SMA 8 and SMA8 moves under SMA13, then a Sell order can be placed.
For instance, there was a good opportunity for traders to place a Sell order, however, they had to wait until all conditions have been fulfilled.
Another SMA with 25 periods and dark orchid colour can be inserted for more trustworthy indicators.
Based on the principle, if SMA with higher period is placed under SMA with lower period and price moves higher than all SMAs, then there would be a good place to order a Buy trade.
For instance, there is an upward trend with Buy signal from SMA indicators.
Later market price and indicator signals did not show any opportunity to place an order until another Buy signal on an uptrend.
Moving Average is a Lagging indicator so it cannot produce any reliable and important signals on a Range market.
Special indicators that can be considered as support and resistance lines are as follows:
- EMA with 50 periods
- SMA with 100 periods
- EMA with 200 periods
Previous SMA examples can be deleted from the chart to insert the new MA indicators.
By a simple review of market price movement and EMA50, it can be concluded that EMA50 shows a supportive behaviour on a price trend.
EMA50 has a supportive effect on price movement even if timeframe is changed to another format.
Trader can import SMA100 and EMA 200 for more signals.
That concludes this session, until next time and another session take care.