In this article I want to share with you information about the experience of working with the indicator Moving Average. Let’s start with a definition, configuration and characteristics of the indicator.
Moving Average (MA) – this is the standard (built-in MT4 platform) trend indicator that shows the average price for a certain period of time. In simple terms, MA indicates the direction of the trend, prices tendency to increase or decrease in the future.
Indicator period in the period are often indicated Fibonacci numbers and the numbers that are tied to a specific time interval. Let us consider more detail on the numbers, namely, 24H, 120H, 480H. Why them? Because these periods have a logic, as shown in this case, the average cost per day, week, month on the hourly chart, you can also use a different time period, for example: D1 with the parameters of 1, 5, 20, or longer periods of MA 60 D1 (quarter) 120 D1 (six months), 240 D1 (year), as an example and ideas in the selection period. MA period depends on the time frame and the trader’s trading style: short, medium, long-term.
Application to the price takes into consideration what prices the indicator will be taken for the calculation of: open, close, high, low. Often used in the trade price type close. Let me explain why. The closing price of a certain time period – this is the main price, which pay attention to professional traders. This is the result of the struggle of buyers and sellers, which shows who has won on a certain stretch of time. You can draw an analogy with sports, such as jogging. It does not matter who first escaped from the start (open price), who during the race was the first or the last (high, low); important finish – according to it the winner is determined (close).
MA method, or types of moving averages.
- Simple MA (Simple Moving Average) – the arithmetic mean of price for a certain period of time, all prices given equal importance.
- Exponential MA (exponential moving average) – the arithmetic mean of prices for a certain period of time, but this type of MA attaches greater importance to the latest prices, fast type of MA.
- Linear Weighted MA (linearly weighted moving average) – the arithmetic mean of price for a certain period of time, also attaches greater importance to the latest prices, but faster and more sensitive type of MA compared with the Exponential MA.
- Smoothed MA (smoothed moving average) – the arithmetic mean of price for a certain period of time, the slowest and least sensitive to changes in price MA type.
Each of the types of moving averages have their advantages and disadvantages when trading in different markets. In volatile markets more preferable to use exponential moving average and linearly weighted moving average, as they are faster and more sensitive to changes in price, but on one condition – if the trend will continue after the appearance of potentially signal from these types of moving averages. If not, are more preferred simple and smoothed moving averages, which are less quick and less sensitive to price changes. Knowledge and understanding of these nuances will allow traders to benefit from the shortcomings make, and vice versa.
Application in trade
Since the trend indicator, then it will work in a trending market. In the flat and on the turn does not work, at least in the initial phase of the turn.