Moving Average (MA) is a technical indicator that creates continuous updates about the average price. This average is taken from a particular timeframe that can be either 20 minutes, 5 days, 10 weeks or any other specific period of your choice. MA is proved to be a useful, reliable and objective tool that allows traders to enhance the number of winning trades at ease.
Different Types of Moving Average
Moving average can be evaluated from various methods. Five day simple moving average (SMA) adds to the simple five recent closing prices of the day and then divides the total value with five for creating a precise average. The average then is connected to one another for formulating a single flow line. Another common type is exponential moving average (EMA) whose calculation is relatively complex. In EMA, the higher weight of the latest data is placed to figure out rise or fall in the moving direction. Acquiring detailed understanding about its calculation may not be essential, as common charting systems evaluate the value of EMA automatically.
How To Use Moving Average?
The typical MA length consists of 10, 20, 50, 100 and even 200. These lengths can be implemented to the timeframe of any chart (minute, weekly, days or months) based on the demand of the trader. The selected length or time period is denoted as "lock book period". The MA that has a short time frame (low period used for its calculations) comes with the probability of reacting quicker than those with a long time-frame.
Adjusting the length of moving average based on historic data can produce accurate future signals and lead to better order. But also make sure to not overoptimize the settings of your Moving Average.
Crossover is an interesting strategy that can be incorporated when using MA. When a price crosses below or above the MA then the trend is known as "price crossover". Similarly, if shorter MA moves beyond longer MA then it provides a buy signal, indicating that the particular trend is about to shift - this is called as "golden cross".
On the other hand, if the shorter MA remains below the longer MA then it is a sell signal, showcasing a downtrend - this is known as "death cross". Traders also use Moving Average as a moving support and resistance price levels and use Moving Average in a conjunction with other tools of technical analysis (like Price Action patterns, trend analysis or any other forex indicators).
Why Use Moving Average?
Moving average narrows the complications of a price chart and offers better understanding about the upcoming trends. When the average gets angled up then the price would rise, while when it goes down the price will go down as well, moving in horizontal ways means the price will be in a range. However, it is important to be aware of possible delay of Moving Average in comparison of the latest market moves due to their averaging concept.
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