Forex

Moving Average Indicators

Hi there!

With you Raymond Toh, your tour guide for few next weeks to the world of MetaTrader (Actually Forex) Indicators and Expert advisors. We are going to study the most important indicators around at the main place and occasionally we will scratch the land of the important Experts. That’s because the indicator are the heart of the technical analyses and the Experts are the result of good and well-proved indicators.

In my humble opinion I can’t start with any indicator before the Moving Average Indicator because it’s the one that every trader (whatever the level of his experience) is using and/or used it. Even the students in the preliminary schools studied it!

Moving Average- What does it Mean?

The Moving Average is an indicator that shows the average value of the price of a currency over a set of value.
Actually this in not the general definition of the Moving Average but the one suitable for Forex. Moving Average is used in any field where the statistics science is used!

What are the MA types?

There are four (The well-known) type of Moving Average indicators:

Simple
Exponential
Smoothed
Linear Weighted

Simple Moving Average - SMA:

The Simple (Arithmetical) Moving Average is the simplest version yet the widely used one.
It calculates the average of the price by adding the prices of the specified period together then divides it by the number of the prices. For example the Moving Average of the last 50 days closing price is the addition of these prices divided by 50.

The SMA indicator gives all the values the equal weighted and that’s the different between it and the other types of moving average (and that’s what distinguish between one type from another).

Let’s give a look for a SMA of 20 days on the EURUSD daily chart.

I’ve mentioned above the closing price as the applied price for the Moving Average calculation; This is not the only price the Moving average can use, Moving average can use one of these prices kind:

Opening Price:
The instrument open price of the calculated period

Closing Price:
The instrument close price of the calculated period

Highest Price:
The instrument highest price of the calculated period

Lowest Price:
The instrument lowest price of the calculated period

Median Price:
The instrument median price of the calculated period, this price calculated as following:
Median Price = (High price + Low price) / 2

Typical Price:
The instrument typical price of the calculated period, this price calculated as following:
Typical Price = (High price + Low price + Close price) / 3

Weighted Price:
The instrument weighted close price of the calculated period, this price calculated as following:
Weighted Price = (High price + Low price + Close price + Close price) / 4

Exponential Moving Average - EMA:

The exponential Moving Average indicator smoothes the Moving Average by adding the Moving Average the current closing price to the previous value and giving the last prices more weighted value. The Exponential Moving Average reacts faster to recent price changes than SMA.

Smoothed Moving Average - SMMA:

The Smoothed Moving Average indicator smoothes the Moving Average by giving the recent prices an equal weighted to the historic ones. It recommend to use the SMMA with long period to get better result.

Linear Weighted Moving Average - LWMA:

The Linear Weighted Moving Average indicator smoothes the Moving Average by giving the latest data more weighted value than more early data. That’s limit the effect of the price fluctuations of the recent price.

How to trade using Moving Average Indicators:

Actually studding the usage of Moving Average indicators in trading Forex needs a whole book but we try to know the most used usage of MA briefly in this section.

The important rule to bear in your mind is that” Where’s a trend where’s the Moving Average” which means the Moving Average work better in the trend market and they act bad in the time of fluctuations of the market

Moving Average Breakout:

In this method we need to plot a Moving Average Indicator on the chart (i.e. 24 hours LWMA on EURUSD Hourly chart).

When the price crosses the Moving Average down-up and there’s a complete candlestick above the Moving Average indicator we Buy.
When the price crosses the Moving Average up-down and there’s a complete candlestick below the Moving Average indicator we Sell.

Moving Averages Crosses:

In this method we need two (or more) Moving Average Indicators; The first one will be set with a small period (It called the Fast Moving Average) and the second one will be set with bigger period (It called the Slow Moving Average). i.e. 10 days EMA and 80 days EMA on EURUSD Daily chart.

When the Fast Moving Average crossed the Slow Moving Average down-up we Buy.
When the Fast Moving Average crossed the Slow Moving Average up-down we Sell.

Moving Averages Channel:

In this method of trading we use two Moving Average Indicators which hardly could cross each others (i.e. The first Moving Average is 10-Period SMA of the price high and the second Moving Average is 8-Period SMA of the price low)
These indicators will plot upper and lower boundaries of the channel.

When the price crosses and a complete candlestick is above the upper boundary of the channel we Buy.
When the price crosses and a complete candlestick is below the lower boundary of the channel we Sell.

There are thousands of methods and settings the traders use Moving Average to implement everyday trading. That’s why I’ve started with this indicator my articles!

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