The moving average is one of the most commonly used technical trading indicator in doing technical analysis. It is mostly denoted as MA.
Moving average is used to determine the market trend.
The moving average normally calculated the averages of the prices within a specific period ‘X’ in the past market movements. ‘X’ period is counted from the current market price moving backwards till the end of the specified period.
There are different types of moving average. These include:
- The smooth moving average (SMA)
This calculates the simple average of the close price within a given period ‘X’. It is usually very stable but also slow when it comes to giving trading signals.
You will find the SMA with a number at the beginning. This number usually designated the period which is usually in days. For example, 5-SMA means that the smooth moving average has a period of 5 days. You can change the period whenever you want.
The smaller the period of the SMA, he more the signals it will give you. Therefore if you want to do short term trading, then you can use small periods. On the other hand, if you want to do long term trading then you should use longer period like of 200.
- The Exponential Moving average (EMA)
This works like the simple moving average with the only difference being that it is more responsive due to the exponential part.
The results of the EMA are raised to a certain power and they are therefore weighted or in simple terms the figure is expanded.
They are more used compared to SMA due to their responsiveness to the most recent price changes. They has reduced lag thus responding to the current trend more easily.
- The Triple exponential Moving Average (TEMA)
By tripling the exponential effect of the EMA, the TEMA seeks to reduce the lag and make the indicator more responsive to the market trend.
Therefore, the TEMA respond to the market price change better than the SMA and EMA. Nevertheless, this indicator may at times responds to very insignificant changes thus overshooting the market prices resulting to whipsaws and unstable trading signals. As a result, TEMA does not have good smoothing qualities and will require to be used with another indicator to smooth the signals.
- The Adaptive moving average (AMA)
The AMA is as a result of multiplying the weighting of the EMA by a given factor. This makes the AMA more adaptive to the market changes than the EMA.
It is a great choice when trading volatile markets like the EURUSD. The AMA will tend to adapt quickly to volatility changes and thus helps to indicate when there is a change in the market volatility. It is also a great choice when trading news releases.
- The Hull moving average (HMA)
The Hull moving average solves the problem of balancing between the smoothness and lagging. The moving average uses a number of weighted averages to try and cancel the effects of lagging. When canceling the lag, the indicator is also smoother since the averages are not weighted nor multiplied by a factor but just added.
- Jurik moving average (JMA)
This is not mostly used. It originated from the Jurik research. It is mostly used by institutional traders.
This moving average is quite complicated since it used the knowledge of moving targets. In short it tend to target a market price depending on the previous market prices and then moves along with that target as the market prices change.
This indicator is downloaded as a locked indicator and you cannot access the source code. The code is still hidden.
Using the moving average
When choosing the moving average to use, you should first consider what type of trades you want to place. If the trades are long term, then you should use moving averages with longer periods. But if you want to place short term trades, then you should use shorter periods. And this applies to all the types of moving averages.
The same applies to the time frames. When trading on a tight time frame, then you should use an MA with a shorter period and wen trading on a long time frame then you can use MA with longer time frame.
When trading, you should also ensure that the moving average’s color is distinct from the colors you have chosen to use for your chart background and candlestick.
Placing trades using moving averages
The moving average indicator gives its signals in terms of getting below or above the market prices.
- A buy order
For you to place a buy order, the market prices must be above the moving average and the trend must be bullish. You should place your order at the second candlestick after the market gets above so as to ensure that the market prices are surely on an upward direction.
- A Sell order
For you to place a sell order, the market prices should be below the moving average and the trend should be bearish. You should place your order at the second candlestick after the market gets below so as to ensure that the market prices are surely on a downward direction.