Moving Average: a simple way to find a trend

The Moving Average (MA) is one of the most used indicators in trading. Traders love it for its simplicity and efficiency. In this article, we will explain what this indicator is and how to use it to
increase your profits.

What is a Moving Average?

The Moving Average is a trend indicator. It takes average price figures and smoothes price action from fluctuations as a result.

Types of Moving Averages

There are four main types of Moving Averages on the platform. It is important to understand the idea of each type.

Simple Moving Average

Typically, traders use a Simple Moving Average. This type of MA shows the average closing prices for the period it considers. As a result, all prices have the same value. For example, if we have a 10-day Moving Average, we calculate the sum of 10 closing prices and divide it by 10. Each time a new closing price is formed, the highest
old is no longer considered.

Exponential Moving Average and Weighted Linear Moving Average

Exponential MA and Linear Weighted MA are very similar. They calculate the latest prices with the highest coefficient. As a result, these MAs reflect price movements more and give signals faster. But be careful! These MAs give fast signals, but some of them may be false.

Smoothed Moving Average

The Smoothed MA is based on the Simple MA. It is easy to define its main function after the first look at its name. This Moving Average better clears price movements from fluctuations. It is the best to define a trend.

How to implement Moving Averages in MetaTrader

The MA is included in the platform, so you do not need to download it. Go to “insert”, search for “indicators”, and type MA and you will see the Moving Average. It is very important to apply the correct settings.

Moving Average Period

The period is the number of candles that will be taken into account for the calculation. The longer the period, the smoother the MA and the more accurate the signals will be. The shorter the period, the closer the MA will be to the price.
There is no single rule for which MA period to use. When analyzing charts with large time frames, traders prefer MAs with periods such as 50, 100, and 200. For trading on smaller time frames, investors prefer small periods such as 9, 12, and 26.

Moving Average Price

There are several options. They can be closing, opening, maximum, minimum, median, typical and weighted closing prices.

The opening and closing prices are clear, but what are the median, typical and weighted prices? Everyone uses a different price to calculate the average.

•The median price is the midpoint of the trading range for each period.
•The typical price is the approximate average price for each period.
•The weighted average takes into account the varying degrees of importance of numbers in price data.
Let’s consider an example. MA20 is a 20 period average. If we take 20 opening prices or 20 closing prices, the result will be different, so the lines will also be slightly different. In the image you can see where to choose the type of price list desired.

We click on the MA and the «Setting» option will appear to configure the indicator.

However, generally traders use the closing price.

MA Shift

The “Shift” is used to move the indicator forward and backward in time. As a result, the MA will move up or down.

How to use Moving Averages in Forex trading

The MA is a trend indicator, so we will start with a trend detection. If you want to know if the market is bearish or bullish, a crossover will help you.

Golden Crossing

When an MA with a smaller period crosses another with a larger period from bottom to top, it is a buy signal.

Death Crossing

When an MA with a smaller period crosses another with a larger period from top to bottom, it is a sell signal.

Mobile Media and the trend

Now let’s talk about the trend function. If the indicator goes down, it is a bearish trend. If the MA goes up, it is an uptrend.

Moving Average and support/resistance levels

The Moving Average is widely used as support and resistance levels. The strength of the levels will depend on the period of the MA. The longer the period, the stronger the support/resistance. Temporality also plays an important role. The longer the temporality, the stronger the MAs will be. If you compare the 200-hour MA with the 200-day MA, the latter will be a stronger level and, as a result, the price is more likely to fluctuate near it.

Using MAs as support and resistance levels, we have the opportunity to determine the levels to open a position. When the price breaks above the MA, it can be a signal to buy. And vice versa, a break below the MA will give a signal to sell.

Tip: If the price reaches the MA several times, it means that a reversal is probably coming.
It is always a good idea to use a Japanese candlestick chart. The patterns there can give strong
signs of a reversal and continuation of a trend.

Advantages of the Moving Average

A great advantage of MAs is that they are not the only indicator; They are part of other technical indicators. The most famous indicator based on MAs is MACD. You can also find MAs in trading tools such as Alligator, Bollinger Bands, Ichimoku Kinko Hyo. The multifunctionality of AM is another crucial benefit. Identifies the direction of a trend and displays it visually on the chart. Additionally, it finds trend reversals and finally shows possible support and resistance levels. The MA is a really effective instrument due to its simplicity. That’s why it’s so popular.

Disadvantages of the Moving Average

No method is perfect, and MAs have their drawbacks. Let’s talk about some of the most debatable ones.

•MAs only draw trends based on previous price information. Like any
technical analysis tool, graphical indicators do not take into account changes in
fundamental factors that can affect the future performance of an asset’s movement, such as
new competitors, greater or lesser demand for products in the industry or changes in the
management structure of a company.
•There is an ongoing debate about whether more emphasis should be placed on the final days of a period of
time, for example, with Exponential Moving Averages (EMAs). Many believe that more data
recent ones better reflect the direction of movement of an asset, while others believe that
Making some days more important than others misrepresents the trend.
•Assets often have cyclical behavior that is not reflected in MAs. Therefore,
If the market goes up and down a lot, the MAs are unlikely to capture significant trends.
•The purpose of any instrument is to predict where the price of an asset will be in the future.
However, if it does not move in any direction, it does not provide a signal for profit.
with short buying or selling.

Moving Average and other technical indicators

We always remind traders that there is no perfect indicator, so it is important to combine them to get stronger signals. MAs, for example, work well in combination with other indicators.

Moving Average and Momentum

Momentum indicators, such as the Average Directional Index, ADX or MACD, often indicate an imminent change in market direction before the price moves enough to trigger a Moving Average crossover. Therefore, traders often use these momentum indicators as early warning signs that the market has peaked or bottomed, or is about to make another jump forward in the current trend.

Moving Average and Oscillators

Oscillators are excellent in combination with MAs. Moving Average crossovers can also confirm RSI signals that the market is overbought or oversold. The RSI is often used to obtain early signals of possible trend changes. Therefore, adding EMAs can help as they react more quickly to recent price changes. Relatively short-term Moving Average crossovers, such as crossing a 5-period EMA with a 10-period EMA, are best to work in conjunction with the RSI. When the 5-period EMA falls below the 10-period EMA, it confirms the RSI indication of overbought and a possible downtrend reversal. Conversely, an upward crossover provides an additional indication that the market is oversold and will soon reverse to the upside.
rise.

Always look for confirmation. Remember that you need at least two matching signals to start trading.

The 4 main questions about the Moving Average

Now let’s answer the most popular questions asked by beginner traders.

Is the Moving Average a good indicator?

No indicator is perfect. MA is no exception and has its pros and cons. It is excellent for identifying trends, however, it lags and does not show new information. Still, it is one of the most popular indicators to use.

Why is the Moving Average method used?

Traders prefer to use the Moving Average method because it helps smooth price data by creating an average price that is constantly updated.

Which Moving Average to use for different trading styles?

The period of the MA will depend on the style and objectives of the trader. The shorter ones (5-20 periods) are best suited for scalpers and intraday trading. Traders interested in swing trading will choose longer MAs, which can have a period of 20 to 60. Position traders will prefer MAs with 100 or more periods.

Which Mobile Media to use for cryptocurrencies?

In general, it doesn’t matter what asset you trade with MAs, it depends more on the style of the trader. However,
The cryptocurrency market is a mostly trend market. Therefore, using MAs to smooth out price action and determine the direction of the overall trend can be of great help during cryptocurrency trading.

Conclusion

Let’s generalize what you just read. The Moving Average is a technical trend indicator that reflects price movements. It is a trend indicator, so it works best when the market is in an uptrend or downtrend. 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 encounter a death cross.