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Forex Trading Strategy Moving Average is Explain For new traders.
Moving Average Trading Strategy
The moving average crossover strategy is geared toward finding the middle of a trend. A trend defines price action in which prices move in a specific direction over a period of time. Generally trends are either upward or downward, as sideways movements are considered consolidation and not trends. Most of the time, approximately 70%, capital markets trade in tight consolidative patterns and only trend 30% of the time.
What is a Moving Average?
A moving average is a technical indicator that market analysts and investors may use to determine the direction of a trend. It sums up the data points of a financial security over a specific time period and divides the total by the number of data points to arrive at an average. It is called a "moving" average because it is continually recalculated based on the latest price data.
WHY MOVING AVERAGES ARE POPULAR
Moving averages are simple to use and can be effective in recognizing trending, ranging, or corrective environments. Often traders will use more than one moving average because two moving averages can be used as a trend trigger. In other words, when the shorter moving average crosses above the longer, slower moving average, this can be viewed as a cue to enter long. The long trading bias remains until the moving averages reverse or the target is hit.
The simple moving average is a lagging indicator because it is based on past price data. The longer the time period of the SMA, the greater the lag. While the SMA is a helpful technical analysis tool, it is best used along with other popular indicators such as trendlines and volume analysis. For learn more about SMA click here...
At the beginning, all traders ask the same questions, whether they should use the EMA (exponential moving average) or the SMA (simple/smoothed moving average). The differences between the two are usually subtle, but the choice of the moving average can make a big impact on your trading. Here is what you need to know:
There is really only one difference when it comes to EMA vs. SMA and it's speed. The EMA moves much faster and it changes its direction earlier than the SMA. The EMA gives more weight to the most recent price action which means that when price changes direction, the EMA recognizes this sooner, while the SMA takes longer to turn when price turns.
How to use a simple moving average
There are two main ways to use the simple moving average. The first is trend analysis. At a very basic level, traders and investors use the SMA to assess market sentiment and get an idea of whether the price of a security is trending up or down.
The basic rule for trading with the SMA is that a security trading above its SMA is in an uptrend, while a security trading below its SMA is in a downtrend. For example, a security trading above its 20-day SMA is thought to be in a short-term uptrend. In contrast, a security trading below its 20-day SMA is thought to be in a long-term downtrend. By analysing the SMA, the investor or trader can quickly assess market trends and determine whether the security is trending upward or downward.
Simple moving averages can be useful in spotting trend changes. They can also be used to identify support and resistance levels. Often, during a trend, the SMA will provide a dynamic level of support or resistance. For example, a security in a long-term uptrend may continually pull back a little, but find support at the 200-day SMA. This can also be helpful in identifying trend changes. This method can be used across many markets, including foreign exchange, indices and stock markets. For Learn more about forex trading strategies, join a forex forum. Because, inside a forex forum you will get all forex trading related resources.
SMA Tips
- Shorter time frames tend to hug price action more closely than longer ones because they are focused more on recent prices
- Shorter time frames will be the first to react to a movement in price action
- Look at short and multiple time frames; for instance, look at both the 10 and 15 minute charts simultaneously.
WHO USES MOVING AVERAGES
Moving Averages are most popular to new traders, for good reason. They help traders to define the trend and potential entries in the direction of the trend. However, moving averages are also utilized by fund managers and investment banks in their analysis to see if a market is nearing support or resistance or potentially reversing after a significant period.
SMA FORMULA
The SMA indicator is common on Metatrader4 trading software, and the calculation formula smoothes pricing information by averaging as follows:
- Choose a "period" setting – assume "10" for example;
- Choose a "price" setting – assume "closing price";
- Add up the sum of the last "10" closing prices and divide by "10"
- Repeat the same process when the next closing price is posted.
On the other hand, A commonly used trading indicator is the exponential moving average (EMA), which can be superimposed on a bar chart in the same manner as an SMA. The EMA is also used as the basis for other indicators, such as the MACD (moving average convergence divergence) indicator.
Although the calculation for an EMA looks a bit daunting, in practice it's simple. In fact, it's easier to calculate than an SMA, and besides, your charting package will do it for you. Here are the calculations:
EMA [today] = (Price [today] x K) + (EMA [yesterday] x (1 – K))
Where:
K = 2 ÷(N + 1)
N = the length of the EMA
Price [today] = the current closing price
EMA [yesterday] = the previous EMA value
EMA [today] = the current EMA value
The start of the calculation is handled in one of two ways. You can either begin by creating a simple average of the first fixed number (N) of periods and use that value to seed the EMA calculation, or you can use the first data point (typically the closing price) as the seed and then calculate the EMA from that point forward. Traders handle it both ways.
Advantages and Disadvantages
The main advantage of the SMA is that it offers a smoothed line, less prone to whipsawing up and down in response to slight, temporary price swings back and forth. The SMA's weakness is that it is slower to respond to rapid price changes that often occur at market reversal points. The SMA is often favored by traders or analysts operating on longer time frames, such as daily or weekly charts.
The advantage of the exponential moving average is that by being weighted to the most recent price changes, it responds more quickly to price changes than the SMA does. This is particularly helpful to traders attempting to trade intraday swing highs and lows since the EMA signals trend change more rapidly than the SMA does.
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