A moving average (MA) is one of the most basic technical indicators and is an average of a predetermined number of prices such as the closing prices calculated over a number of periods like 100 candles. The higher the number of candles in the average, the smoother the moving average line is. The lower the number of candles in the candle, the choppier it is.
Moving averages are of two types. 1) Simple Moving Averages (SMAs). 2) Exponential Moving Averages (EMAs). SMA is only a simple average. It is obtained by adding all the candles that you would like to measure. EMA is obtained by exponentially smoothing the SMA. The EMA responds more quickly to price changes as compared to SMA. EMA pays more attention to newer candles.
Instead of watching the up and down behavior of each candle you are watching the relatively smooth moving average line. A MA makes it easier to visualize price action without statistical noise.
Moving averages are lagging indicators. They are not leading indictors and its signal occurs after the new price movement not before it. A MA can only tell you what has happened, not what will happen. Moving averages do not think ahead.
Still, moving averages have a critical role to play in planning your trades in advance. Past does not always predict the future but it sure likes to repeat itself. Several different moving averages are used at once. They offer different pieces of the puzzle when planning our trades.
When the market is steadily rolling, moving averages keep us in our trades. If something changes like the moving average crossover, time to get out or trade the new direction. Moving averages are frequently used as price filters.
The most obvious use of MAs is to watch for crossovers to confirm new trends. A short term MA has to cross a long term MA in order to filter choppier price action into a reliable indication for true price action.
Short term MAs are more sensitive to price action as they are measuring fewer candles. Longer term MAs are less sensitive to price action. Longer term MAs tend to be more flat and are less likely to whipsaw up and down.
If the fast EMA crosses below the slow EMA, it is predicting new downward price action. When MAs do cross over you should take notice at once. On the other hand, if the fast EMA crosses above the slow EMA, it is predicting a new upward price action.
MA crossovers often occur too late and will put you in the market with an unfavorable risk to reward ratio. Beware such crossovers should not prompt you to jump into a trade at once.
A crossover should be part of the trade plan that you have developed in advance. Not every crossover is the same. Moving average crossovers are great as they are easy to see. It will immediately attract your attention but simply do not replace the work of planning your trades.
Moving averages are of two types. 1) Simple Moving Averages (SMAs). 2) Exponential Moving Averages (EMAs). SMA is only a simple average. It is obtained by adding all the candles that you would like to measure. EMA is obtained by exponentially smoothing the SMA. The EMA responds more quickly to price changes as compared to SMA. EMA pays more attention to newer candles.
Instead of watching the up and down behavior of each candle you are watching the relatively smooth moving average line. A MA makes it easier to visualize price action without statistical noise.
Moving averages are lagging indicators. They are not leading indictors and its signal occurs after the new price movement not before it. A MA can only tell you what has happened, not what will happen. Moving averages do not think ahead.
Still, moving averages have a critical role to play in planning your trades in advance. Past does not always predict the future but it sure likes to repeat itself. Several different moving averages are used at once. They offer different pieces of the puzzle when planning our trades.
When the market is steadily rolling, moving averages keep us in our trades. If something changes like the moving average crossover, time to get out or trade the new direction. Moving averages are frequently used as price filters.
The most obvious use of MAs is to watch for crossovers to confirm new trends. A short term MA has to cross a long term MA in order to filter choppier price action into a reliable indication for true price action.
Short term MAs are more sensitive to price action as they are measuring fewer candles. Longer term MAs are less sensitive to price action. Longer term MAs tend to be more flat and are less likely to whipsaw up and down.
If the fast EMA crosses below the slow EMA, it is predicting new downward price action. When MAs do cross over you should take notice at once. On the other hand, if the fast EMA crosses above the slow EMA, it is predicting a new upward price action.
MA crossovers often occur too late and will put you in the market with an unfavorable risk to reward ratio. Beware such crossovers should not prompt you to jump into a trade at once.
A crossover should be part of the trade plan that you have developed in advance. Not every crossover is the same. Moving average crossovers are great as they are easy to see. It will immediately attract your attention but simply do not replace the work of planning your trades.
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Discover A Revolutionary New Forex Robot. Develop your own Forex Trading System.
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