Moving Average Technical Analysis
Learning the Basics of MA for Online Forex Trading
Moving average is a basic technical indicator, as almost all traders effectively use it, even those who are focused on fundamental analysis rather than technical analysis. Moving average is available on all trading platforms (i.e. trading software like MetaTrader). In fact, some basic indicators are always needed for better understanding of the price movements in the charts.
Mathematics of Moving Average
Moving Average is just based on a simple averaging formula, as calculates the average value of price in a given period of time. Mathematically, the moving average indicator regularly calculates and draws a real-time value based on the past n bars.
What Is It Good For?
All financial markets including forex and stock have severe price fluctuations, and sometimes it leads to sharp peaks, i.e. temporarily price movements. These sharp peaks are not a part of the overall market trend, but just temporary shocks to the market. Moving average just normalizes the price chart by ignoring such temporary movements.
On the other hand, moving average is the basis of several leading trading systems. Considering moving averages with different periods can show the difference in the market trends in various time scales. One of the most famous trading systems is ‘moving average crossing’, which provides useful information about the turning points.
Moving Average Parameters
Period: The main parameter of moving average is the period of time, in which the moving average is calculated and drawn. In technical analysis, the value of moving average period is usually quoted in parenthesis.
Type: Depending on the moving average formula, moving average can have different types, but just four types are commonly used:
- Simple Moving Average (SMA)
- Exponential Moving Average (EMA)
- Smoothed Moving Average (SMMA)
- Linear Weighted Moving Average (LWMA)
When weight coefficients assigned to the latest data are different, moving averages of different types are considerably diverged. This is related to the mathematical formula applied for calculating different types of moving averages. For instance, all prices in a given period are equal in value when utilizing simple moving average; but Exponential and Linear Weighted Moving Averages attach more value to the latest prices.
In addition, moving average can be calculated from different sets of data such as opening and closing prices, highest and lowest prices, trading volume or any other indicators.
Not only as a stand alone indicator but also as a primary technical indicator, it is used as a smoothed version of the chart price to calculate other indicators. In other words, other indicators use the moving average data instead of the chart price data. This is indeed an advanced approach for technical analyzers, as is accompanied by incredible results upon success in find appropriate settings.
Further Readings
Jeffrey Katz, Donna McCormick, The Encyclopedia of Trading Strategies, McGraw-Hill, 2000.
Clif Droke, Moving Averages Simplified, Marketplace Books, 2001.
Scot Lowry, Magic of Moving Averages, Traders Press, 1998.
Clif Droke, Stock Trading with Moving Averages, Publishing Concepts, 2002.
MA (Red), EMA (Blue), SMMA (Yellow), LWMA (Orange)
|
What do you think about this article?
More in Business & Finance
Latest Articles