Some traders use moving averages as resistance and support indicators or focus on whether a candle has closed above or below a specific moving average. The ability to use moving averages in the same manner as professional traders can make all the difference in the world with regards to your earnings. With that in mind, allow us to explain just how to do this.
A cross is the most basic type of signal and many traders favor it because it eliminates the emotional element of trading. The most basic type of crossing occurs when the price of an asset moves on one side of a moving average and ends on the other. As we have commented, price crossings are used by traders to identify impulse changes and can be used as a basic output or input forex strategy. A crossing below a moving average can signal the beginning of a downward trend and will probably be used by traders as a signal to close any existing long position. On the contrary, a closure above a moving average from below may suggest the beginning of a new upward trend.
The second type of crossing occurs when a short-term average crosses through a long-term average. This signal is used by traders to detect when the momentum is changing in one direction and a strong movement is likely to approach. A buying signal is generated when the short-term average crosses above the long-term average, while a selling signal occurs when a short-term average crosses below a long-term average.
These methods are not the best way to use moving averages. In fact, they can be used much more cost-effectively if we use moving averages as impulse indicators, indicating the absence or strength of a trend, in company with other factors that recommend entry. This is how moving averages are often used by Forex market professionals.
Types of Moving Socks
There are several different types of moving socks and we should know each one before using them. Almost all graphics platforms offer all kinds of moving socks. Firstly, you should know that moving averages can be applied to the closing price, the opening price, or to high or low prices in a timeframe. They are usually applied to closing prices, and this is logical since closing prices are of great importance, and each opening price is also a closing price or a previous candle. Closing prices weigh heavily on the samples because it is often a level at which the price has settled.
At this point, let’s take a look at each type of moving average.
The simple moving average (SMA) is only an average of all the periods to which it refers.
The exponential moving mean (EMA) is calculated by giving more weight to the most recent value. In other words, we say that, for example, if the price has not moved, but starts to go up, an EMA will be demonstrating a higher level than an SMA for that same review time period.
The linear weighted moving average, sometimes referred to simply as a weighted moving average (LWMA or WMA), is like the EMA, being also calculated by giving more weight to the most recent value, but the weighting is proportional throughout the data series, while EMA only gives more weight to the most recent sample.
There are other types of moving stockings, but you don’t need to worry about them. These three types can provide you with everything you need.
Important Moving Stockings
There are some specific moving averages that are used by many traders. I will describe them here, but I do not suggest that much attention be paid where the price is related to any of them as if this were something very important in itself. The important moving averages are:
- 20 EMA
- 50 SMA
- 100 SMA
- 200 SMA
- 200 EMA
Using Moving Stockings as Impulse Indicators
One of the best occasions to use moving socks like professionals is to use them as impulse indicators to determine if there is a trend and how strong it is. The best advantage that retail traders can take advantage of is to be able to trade in the direction of the trend if there is one.
One way to do this is to observe the slope angle of a moving average. For example, in a strong bullish trend, many traders will be looking at the angle of EMA 20. If the angle is consistent and strong, it is a sign that we have a trend in place. Note how, in the graph below, the EMA 20 is showing a rather strong angle, and also note that the price has remained largely below it in the graph. This is a sign of a downward trend.
Crosses of Moving Averages as Impulse Indicators
A more sophisticated way to do this is to check if a faster moving average is above a slower moving average and check this in several time frames. When you have bigger time frames that show a good trend, but a regression in smaller time frames, this could give you a chance to get in the direction of the trend, when moving averages cross again in the same direction as the time frame greater or smaller.
A combination of moving stockings that I like to wear is EMA 3 as a fast-moving average and SMA 10 as a slow-moving average. There is nothing especially magical about these numbers – beware of traders who swear that something like the LWMA 42 is a magic indicator -, but the difference between them tends to offer us an early warning of a change in the direction of the market. In fact, when we use this combination, I not only check several time frames, but I also need to see that the 10-period RSI indicator matches the address. This type of trading strategy using the moving average in various time frames can be very profitable.
In the example graph below, these two moving averages in all upper time frames are showing EMA 3 below SMA 10. In this 5-minute graph, while this quality existed within the larger time frames, EMA 3 retreated twice before crossing again below SMA 10 as indicated by the blue arrows. These two crossings could have provided profitable operations in the short term.
Deviation From Moving Averages
It is generally not sufficiently appreciated that almost all trend indicators are based on some sort of moving averages. For example, the Bollinger Band is simply the EMA 20 in the center with statistical deviation channels based on the historical price range.
Another way to use a mobile average is to take high probability quick pips following the following strategy. Let’s say that a very short-term moving average like EMA 20 is showing a strong angle and the price generally staying above it. If the price falls suddenly hard enough to get below the moving average, there is a high probability that the price will go back quickly to get back above it.
Another strategy is to look for a candle that is not touching the moving stockings at all, but that is indicating a movement back towards the moving stockings area.
Frequently Asked Questions
How is the moving average calculated?
Basically, a moving average can be calculated by adding the last closing prices of “X” periods and then dividing that number by “X”.
What is EMA trading?
One type of essential tool for assessing trends in markets is the exponential moving average (EMA). In this article, we will present a specific type of stockings called Exponential Moving Media.
What is a mobile media filter?
Using statistics, a moving average is a calculation that is used to analyze a data set in point mode to create averages series. Thus the moving averages are a list of numbers in which each is the average of a subset of the original data.