The vast majority of traders and many indicators use Moving averages in one way or another. It is safe to say that a very common classic indicator. It allows you to predict the direction and strength of the movement in the trend period and determine the exit/entry point in the transaction when trading in the Forex market.
Moving averages come in four varieties
- simple – SMA
- exponential – EMA
- smoothed – SMA
- linear-weighted — LWMA
Simple moving averages are the usual lines on the price chart. Their goal is to smooth and filter the oscillations to determine the direction (vector) of the subsequent movement. SMA is formed by calculating the average price in a certain time interval. The sum of closing prices is divided by the number of periods considered. Looking at this curve, you can analyze the past and predict the direction of further movement is not short-term. Moving averages have only one parameter — period.
Keep in mind that all types of moving averages work with a certain delay.
The curve is obtained the smoother the larger the period under consideration. Accordingly, the longer the period, the slower the curve reacts to price changes and there is a danger of late entry into the transaction. On the other hand, a curve with a shorter period can react very quickly to market fluctuations, news and other factors and lead the trader to a hasty entry or exit. This may result in a loss of funds.
Experts advise to use moving averages on stable trends, as the Flat may often have false signals that are difficult to filter out
SMA has a drawback. It lies in the fact that it evaluates the same as the old indicators, and quite new. But still it is the main and reliable tool for determining the beginning or end of a trend. For a reason they are used in many other popular indicators.
Exponential moving averages (EMA) are used if you want to reduce the lag that SMA has. This is because EMA reacts to the price change only once during the construction. Therefore, new data is given more weight and the indicator reacts faster to changes in the price chart.
Exponential moving averages are the most reliable among all types of moving averages
To calculate the EMA, a certain part of the closing price is added to the MA. The weight of new data on long periods is lower than on short ones. That is, the smaller the period the more accurate and dynamic changes on the chart. The downside can be considered some susceptibility to false external signals. With EMA it is impossible to guess where the market will unfold. But after the end of the reversal, the trader can clearly understand the entry/exit point.
How to use the Moving averages indicator in practice?
There is no special difference in all types of moving averages, although of course you can see the differences. That is why we will not consider in detail the remaining two species. You can do it yourself when setting up your trading platform. The most dynamic and fastest are the EMA, while the SMA are the lazy slow — walkers. Note that the trends are very well expressed – the closest to the price fits LWMA. Which sliding option to choose and with what parameters-you decide based on your experience.
Trend detection is the most acceptable and common way for traders around the world to use moving averages
To see or better to say to represent what is the trend and whether it is necessary to impose on the chart only one moving. Then look at the price movement. If the price breaks through the moving from the bottom up and lingers over it, it is a signal of transition to an uptrend. With a downtrend, the opposite is true — the price should break the line moving from top to bottom and stay below it. On the strength of the trend will say the angle of the sliding. the more it deviates from the horizontal, the more likely the emerging trend is.
Sharing several moving averages on the same chart.
The above chart shows the price of Gazprom with placed on it two sliding SMA with a period of 8 (blue) and SMA with a period of 20 (green). If the faster (blue) SMA crosses the slower (blue)from top to bottom then this is a sell signal, if the bottom up — then buy.
When using three moving signals on one chart, the signal appears at the moment of crossing the fastest TWO slower ones. The signals will be less frequent but clearer.
We advise you, before creating a trading strategy and using indicators, be sure to review how this or that indicator behaves in the past periods to understand the optimality of its settings. As a rule, indicators are used together. We wish you successful experiments and successful trading.