24 Jan Moving Averages, profitable indicator
Moving Averages, profitable indicator
Moving Averages might be the most used indicator used in technical Analysis.
A moving average is simply a way of smoothing price volatility to help you distinguish between typical market “noise” and actual trend direction.
The “Moving Average” calculate the average closing price of a stock/index/currency pair for the last number of periods, indicated as length.
As you see, the moving average looks like a squiggly line over the price (represented by Japanese candles).
This type of technical indicator is known as a “chart overlay”.
The Moving Average (MA) is superimposed on the price chart!
Like any other technical indicator, the moving average (MA) indicator is used to help us predict future trend and prices.
But why not just look at the price to see what happens?
The reason for using a moving average rather than just looking at the price is because in the real world, besides Santa Claus is not real … trends are not in straight lines.
A moving average helps smooth out the random price movements and spot the underlying trend.
Moving Averages, profitable indicator – smooth
By looking at the slope of the moving average, you can better determine the direction of the trend.
As we said earlier, moving averages smooth price action.
There are different types of moving averages and each of them has its own degree of “smoothness”.
In general, the smoother the moving average, the slower it will react to price action.
The more choppy the moving average, the faster it reacts to price movement.
To make a moving average smoother, consider finding the average closing prices over a longer period of time.
How to choose the right parametres like “length” of the moving average
The “length” or number of reporting periods that are included in the moving average calculation affects how the moving average is displayed on a price chart.
The shorter the “length” is, the fewer data (closing candles) are included in the calculation of Moving Average, which also means that the MA is more presice and closer to the current price.
The longer it is, the more data points are included in the moving average calculation, which means that a single price has less influence on the overall average.
If there are too many data points, the price fluctuations can get “too smooth” so that you will not be able to see any kind of trend!
Both situations can make it difficult to see whether the direction of prices might change in the near future.
For this reason, it is important to choose the length (or periods) that will provide the level of price detail that is appropriate for your trading timeframe.
Moving Averages, profitable indicator – most used types of Moving Averages
The two most used Moving Average Indicators used are:
Simple Moving Averages, profitable indicator
Exponential Moving Averages, profitable indicator
Remember, that Moving Averages does NOT predict the future price direction – the Moving Average simply show a historical direction of the trend.