Moving average: tutorial
Moving average is one of the basic indicators used by thousands of traders of different levels. It shows the average trend of the chosen period. That is used to determine a long-term trend and adjust your trading accordingly. MA also helps with “filtering out” sudden movements, breakouts of the market to smooth the overall trend.
There are several types of Moving average - Simple Moving average (SMA), Exponential Moving average (EMA) and Weighted Moving Average (WMA). In that article, we will cover two most popular types - SMA and EMA.
Simple Moving Average
SMA gives a trader an average price movement during the chosen period. For example, if you set a 20-candle period - the moment 21st candle appears on your screen the first one will be dropped and values of 2nd-21st candles will be presented. The price is calculated as the sum of all values divided by the number of candles. That way you always get the correct data for the last 20 candles if you set such period.
Exponential Moving Average
EMA is close to SMA but with one difference. Whereas SMA drops the first candle as a new appears, EMA adds the value of a new candle into calculations. Basically, you set a 20-candle period, but when 21st candle appears, your period automatically expands on 21 candles. EMA will give a bigger weight to recent candles without dropping first ones.
What period to use:
The most commonly used periods are 20-candle period. That suits well for 1-hour trades if you want to trade 5-30 minutes it is recommended to choose shorter period.
Basic rules for trading with MA:
In different sources you could find a rule: “whenever quotes cross the line - open the deal in the corresponding direction”. That tactic isn’t correct and leads to a fast end of your balance. We strongly recommend you to get familiar with basic rules to become a successful user of MA indicator.
- Once you see the quote crossing the MA wait for it to test the trend. It means waiting for 1-2 candles more to be sure the trend continues in correct direction
- Find the correct period - test out different MAs (5,10,15,20 period) to see which one better reflects market movements
- Insert two MAs with different periods to catch the moment for the successful deal
If first two points seem quite understandable, the last one should have risen a couple of questions like “What periods”, “How to determine a trend”, “What expiries”. We will gladly answer those questions in that article.
How to set: insert two EMAs to your graph - EMA with the period of 3 and EMA with the period of 9. That is better to set different colours for two so you can distinguish those.
PUT signal: EMA3 crosses the EMA9 from above
CALL signal: EMA3 crosses the EMA9 from below
That strategy is good for starters. Once you feel comfortable with all the settings, period and usage of Moving average you can switch to more complicated strategies.
Test it on the Demo platform first and then move to the Real.
Once you master basic rules you will be ready to move to a new level. By that time we will prepare a new article for you regarding the advanced level of MA usage.