Trading in the foreign exchange market is a risky business. To reduce the likelihood of losing trades, traders use technical analysis tools. One tool is the Moving Average indicator.
The opinions of experienced players about the need to use any additional constructions on the chart are contradictory. Some believe that the numerous lines, stripes and histograms on the field of the price chart create confusion in the minds of players. Such gurus advise to throw aside all the "turkeys" and work only with the price chart.
Other gurus remind you of the fable about the monkey and glasses and advise you to thoroughly understand at least one simple technical tool, understand its positive aspects and test the theory with practical application.
One of such simple and useful suppliers of signals for a deal is the "Moving Average" indicator.
Formal definition
Moving average is the average price of an exchange asset for a fixed period of time.
The parameter is used as the base for the formation of other indicators based on moving averages.
The time interval is counted in the figures for building the chart: candles or bars. The phrase "moving average with a period of 15" means that on the chart a line will be drawn from the average values for each successive 15 bars or candles.
Suppose the first 15 elements are formed. Based on them, the average price was calculated. When forming the sixteenth candle, the first figure is discarded; candles from 2 to 16 are taken into account.
When forming the seventeenth candle, the actions are repeated. And so the calculations are made for the entire chart array.
When trading on the terminal manually, constructing indicative lines is not done. Line drawing is automated in the MT4 and MT5 trading programs. Therefore, the article will not have mathematical calculations. Interested parties have the opportunity to read the help information in the help section while there is free time between transactions.
In the program, you can select any interval for calculating the average price of a currency pair. Periods from 5 to 50 are called short-term. To make an investment decision when buying or selling currency, you should analyze periods from 120 and above, as the most indicative.
Types of signal lines
An example is a candlestick chart of an asset with a blue moving average line with a short period of 20.
A candle reflects four price parameters:
- value at the time of opening;
- value at closing;
- minimum value for the formation period;
- maximum value.
Accordingly, you can specify the construction of averages for opening or closing prices, minimum or maximum values. You can even calculate the moving average of each candle.
The settings of the trading program take into account the aesthetic preferences of customers and give the opportunity to choose the thickness and color of the line, as well as the shape - solid, dotted or dotted.
By the mathematical method of construction, four types of technical indicator of the moving average are classified. For brevity, we will denote the line by the abbreviation MA - from the term Moving Average generally accepted in technical analysis.
- Simple MA.
- Exponential MA.
- Linear Weighted MA.
- Smoothed MA.
The classification takes place by assigning a rank to candles for performing calculations: the most significant and least significant candle.
Feature of Frequently Used Moving Average
Let us consider in more detail four varieties of the indicator. Two moving averages are applied constantly and effectively. The other two are used in rare cases.
Simple MA assigns the first and last candles in the period the same importance. That is, in the interval 15, the first candlestick is equal to the fifteenth in importance. For this reason, the reaction of a simple MA is slow, and at short distances, the moving average indicator works with a large delay. Simple MA shows itself well for long periods.
Exponential MA smoothly assigns significance to candles in the reverse order: the latter is the most significant, the former is an outsider of calculations. So the line reduces its own sensitivity to price fluctuations at the beginning of the period and strengthens at the end. Therefore, the line reacts to the chart array faster than a simple MA.
The figure shows a graph of a stock asset. The chart contains exponential moving averages: blue for short periods, red for long periods. At their intersection, signals to sell Sell Crossover and to buy Buy Crossover are generated.
Rare types of signal lines
Linear-weighted MA by the principle of selection is similar to exponential, but there are nuances.
The value of the exponential candles decreases smoothly: n, n-1, n-2 ... n-14, 0, for example, over a period of 15.
The linearly-weighted MA of each candle gives weight in the reverse order too, but more sharply: 8n, 4n, 2n, n, n / 2, ..., and so on to the end of the candle array. This line is very dependent on the change in the price of an exchange asset.
Smoothed MA interestingly forms an interval for calculations. Not only candles are taken in the current appointed period, for example 15 candles. Previous intervals are also taken into account. But for them, significance decreases as they move away from the current time interval. Such a smoothed signal is appropriate only for determining long-term trends. But due to the large volume of calculations, the line is motionless, and it is rarely used, mainly for researching techniques of technical analysis.
All four types of the “Moving Average” indicator are presented for general development. In practice, players use exponential MA to identify short-term trends; simple MA is suitable for forecasting for a long period.
The number 15 is chosen as an example of a short period. In practice, other intervals are used, shorter or more authentic, for example, 8 candles or 21 candles.
On long intervals for building MA, choose a year - 365 days, or six months - 180.
Attach MA to trade
The purpose of the analytical construction of additional lines on the price chart is to determine the point of breaking the trend. In the Forex market, the "Moving Average" indicator is the most intelligible tool.
We introduce the concept of “fast” for lines on short periods and “slow” for lines on long periods.
Trend breaking occurs at the intersection of fast and slow MA. The figure shows an asset graph with the intersection of two middle lines, fast with a period of 50 days and slow with a period of 20 days.
The following rules work in the trending market:
- The fast crossed the slow from top to bottom - you have to sell, the price will fall.
- The fast crossed the slow from the bottom up - you have to buy, the price will rise.
In markets with increased volatility, a lot of noise is created, so the rule may stall.
It should be remembered that the lines give a delayed signal. Therefore, it is not worth using the indicator of the intersection of moving averages to enter a purchase transaction. Due to the late arrival of the signal, the trend may lose force. The player will buy, and the price will increase by a little and go down, so the market participant will not have time to react and deliver the burden on time. In order not to accumulate losses, the intersection should be used only for sale.
MA tilt angle
To make a decision about the strength of the trend, you can use the slope of the line. The angle is used for large periods, higher than 21. The longer the period, the steeper the angle, the more pronounced the strength of the trend.
The price of Forex currency pairs not only rises or falls, but is also in lateral movement. Evaluating the moving average slope indicator helps determine the trend towards lateral movement.
When trading on crossing strategies of moving averages, the MA Angle indicator is adjusted. It is not used as a source of signal for action, but as a picture it improves the perception of the situation on the monitor screen.
The benefits of applying a corner
The indicator has the form of a colored histogram with a central line, located below the chart. Histogram color gamut standard:
- Green color - growth.
- Red color - decrease.
- Yellow color - movement in the side, flat.
For example, consider a chart of a pair of euro - dollar. The moving average is drawn in gold. In addition to the histogram, the arrows of the tilt angle are drawn and signed below the moving one:
- green rising - a signal of growth;
- yellow flat - side;
- red falling - decline.
The more intense the growth in the price of an exchange asset, the higher the column of the chart, and vice versa, with a decrease in the growth rate, the height of the column decreases.
The higher the price growth rate, the steeper the angle of inclination of the MA line, the stronger the trend - the player can hold a position or take a pose.
The lower the rate of price change, the smaller the angle of inclination of the MA, the weaker the trend.
At an angle tending to zero, you can only trade "for the rustle of nuts."
Trading systems for evaluating the signal to complete transactions are adjusted to an angle in the range from 15 ° to 35 °. Setting the indicator of the angle of inclination of the moving average can be done for each exchange asset separately.
Dynamic observer
Consider the daily chart of the price of the pound-dollar currency pair, hung with three moving ones: short 10 and 20, long 200. It can be seen that with a strong trend, the price can not break lines, repels from them, and the price trend continues. That is, the moving ones act as support and resistance lines. Moreover, the lines are dynamic, as they move beyond the price of the asset.
Moving ones can be used as levels for arranging stop losses. Put stops outside the lines. When approaching the current price, the feet are rearranged.
Once again: do not use the intersection point of the fast and slow lines for purchases in either short-term or long-term transactions. We saw the intersection - go out, this is indicated by the indicator. Two moving averages crossed - this is a trend change.
If fast and slow crossed, the player closed the deal, and at this time the price crossed the average, you need to look how long the price will be above the resistance level or below the support level.
False breakdown is formed by one candle. If the price draws three or four candles above or below the average, then there is a high probability of a trend change. Why not one hundred percent confidence in the shift? Because you need to look at the average period. The longer the period, the more likely the trend will change during the breakdown. On small periods, the value of the moving average is also small.
Notification tones
World exchanges open at different times. There are periods of coincidence of hours of work when you can pinch off a piece of profit from a currency pie.
News clocks also vary. A stream of important events in each region is broadcast at a specific time.
The price can move in the direction the trader needs for several hours during the trading session.
These three reasons make the player stick to the monitor and lose time waiting.
The alert will help correct the situation - the sound notification function of the trading terminal.
How to install a reminder
There are two ways to set the notifier in the trading terminal:
1. On the screen with the currency pair being traded, select the "Trade" menu, and in it the option "Alert" and move the cursor to the price line. The notifier is installed instantly.
2. At the bottom of the screen, select the "Alerts" tab, select "Settings" and fill out the dialog box. The program offers a choice of 3 notification conditions:
- the price has approached the level of purchase Bid;
- the price approached Ask's sales level;
- the occurrence of the specified time.
When a signal is triggered, the following actions can be configured:
- giving a sound signal Sound;
- file activation file;
- sending mail to Mail;
- sending correspondence to the Notifications mobile terminal.
It is convenient to use an alert when planning an entry or exit point. Many programs have been developed for the moving average indicator with an alert. In addition to the graphical display in the form of arrows above or below the intersection of the middle lines, the user receives a sound signal.
When trading on Forex, an indicator with an alert is used for short periods and with a pronounced trend, because with sideways movement there are a lot of false positives, and for long periods of half an hour the signal comes with a delay.
A few words in conclusion
In conclusion, we note: before starting work on a real account, check any theory of technical analysis, even with the most positive reviews, on demo accounts. After learning the lesson and completing the test, the user can begin enrichment in the foreign exchange market using simple and useful moving averages.