Moving Average (MA) is a tool that helps investors determine the appropriate time to enter orders, take profits, and cut losses. However, not everyone clearly understands what is moving average. This leads to making incorrect trading decisions. Therefore, in this article, Forex Trading will provide complete information about MA lines to help you better understand this tool.
What is the moving average? Things traders need to know
MA stands for “Moving Average” in English. The MA line represents the average price of a series of prices over a certain period of time.
What are the characteristics of the MA line?
The moving average (MA) is a popular technical indicator that traders in the forex market love. The MA line helps investors identify upward, downward or sideways price trends. This helps them make trading decisions and close orders more rationally.
The purpose of the MA line is to track whether the asset price is stable, following a downtrend or uptrend. Moving Averages can be used to time trades, compare market performance, trade against market trends, and identify dynamic support and resistance levels.
Find out the meaning of the line what is the moving average?
So what is the meaning of what is moving average? The answer is that it has the ability to filter unnecessary fluctuations in the market. MA highlights trends based on average prices. By observing the slope of the MA line, investors can easily compare product values between periods, including the past, and predict the market’s upward or downward trend.
The value of the MA line at a period represents the player’s investment expectations during that period. The product price at the time of purchase exceeds the average price of the previous period. This shows that investors are setting higher expectations. It can lead to increased volatility in the forex market.
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The most popular types of MA lines today
The Moving Average is considered an effective technical analysis tool in forex trading. Based on characteristics and calculation methods, MA lines have the following three types:
Moving averages – SMA
What is the Moving Average SMA? It is the simplest form of an MA line. It represents the average price of closing points over a certain period of time.
The advantage of the SMA line is that it is effective in analyzing long-term price charts and it can give accurate results. However, the weakness of the SMA line is that the speed of updating new results is slow. It prolongs the buying/selling process.
Commonly used SMA lines include:
- Short-term SMA: SMA 20, SMA 14, SMA 10.
- Mid-term SMA: SMA 50.
- Long-term SMA: SMA 100, SMA 200.
Exponential moving averages – EMA
Exponential moving average (EMA), also known as Exponential Moving Average. EMA is often used when there are short-term price fluctuations. It only calculates the most recent period of time.
The advantage of the EMA is its ability to reflect short-term price fluctuations. It can detect abnormal signs. This helps investors react quickly to short-term fluctuations. However, the disadvantage of the EMA is that it tends to display too quickly. This causes false signals.
Common types of EMA lines include:
- Short-term EMA: EMA 13, EMA5, EMA 8…
- Mid-term EMA: EMA25, EMA21, EMA75, …
- Long-term EMA: EMA200, EMA100.
WMA – Weighted glide path
Moving average (WMA), also known as Weighted Moving Average. This is a type of weighted moving average. The WMA line is used to identify recent signals without being influenced by past data. So it can overcome the disadvantages of EMA and SMA.
The advantage of the WMA line is its ability to reflect recent price fluctuations. It gives higher weight to the latest values. It helps identify recent signals quickly and sensitively. The WMA line is quite perfect and has a few significant downsides.
What is the formula to calculate the moving average?
So what is the formula what is moving average? Below is the calculation formula for each type of moving average:
Formula to calculate SMA line
- SMA = (G1 + G2 + … + Gn) / n
In there:
- G1, G2, …, Gn: are the price levels in period n
- n: is the time period
Formula to calculate EMA
- EMA(n) = Gt x k + EMA(t-1) x (1 – k)
In there:
- GT: this is the current candle closing price
- n: is the number of cycles
- k = 2 / (n + 1)
- EMA(t-1): is the EMA value in the previous session
Formula to calculate WMA line
- WMA = (G1 x n + G2 x (n-1) + … + Gn) / (n x (n + 1) / 2)
In there:
- G1, G2, …, Gn: are the price levels in period n
- n: is the time period
Instructions for installing MA lines on the MT4 platform
Here are instructions for installing Moving Average on MetaTrader 4 trading software:
Step 1: On the MT4 menu bar, select Insert > Indicators > Trend > Moving Average.
Step 2: A table will appear afterward.
Step 3: In the Method section, you can choose one of the moving averages such as Simple (SMA), Exponential (EMA), Smoothed (SMMA), Linear Weighted (WMA). You can also choose the appropriate period (Period).
In addition, you can customize the color, density, and line style as desired. Once completed, click OK to complete the installation.
How to trade effectively with Moving Average
How to use what is moving average? How to trade in the simplest and most accurate way? Let’s learn about the following 3 ways!
The MA crossover signal can be used
In this method, we will use the SMA line with the period 10 and 20. Accordingly:
- When the SMA 10 line crosses the SMA20 line from the bottom up, this is a bullish reversal signal and you can open a buy order. If the SMA 10 line crosses the SMA20 line from above, you should close the order immediately.
- When the SMA 10 line crosses the SMA20 line from top to bottom, this is a bearish reversal signal and you can open a sell order. If the SMA 10 line crosses the SMA20 line from below, you should close the order.
This is a method that uses moving averages to identify trading signals.
Use MA lines as support and resistance
A common observation is when the price touches the Moving Average. It will often tend to react and reverse. However, the price will not always return immediately when it meets the average line. It may pass a little before coming back.
Therefore, a rule applies to buy and sell only when the price is between the two moving averages. However, traders need to experiment with many different moving averages to find the right combination.
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How to trade rainbow bands using what is moving average?
In this strategy, you use different moving averages (EMA). The entry point will be:
- If all MA lines reverse and are arranged in a certain order. This is the entry point when all lines reverse.
- You can open orders at the support point of the MA lines.
MACD divergence and MA lines are both popular tools in financial market technical analysis, often used to predict trends and determine market entry and exit points. Therefore, in addition to using and learning about what is moving average is, you can also learn about moving average convergence divergence.
Epilogue
Below Forex Trading has helped you understand what is moving average is and instructions on how to use it effectively. Hopefully, this information will help investors better understand MA and apply it properly and effectively in forex trading. You can also refer to the top trading information on the website, which our experts have analyzed and compiled in detail.
Frequently asked questions
What is the advantage of the moving average?
MA line has the following outstanding advantages:
- Filter out random price fluctuations
- Support and resistance
- simple and easy to use
What are the disadvantages of the moving average?
However, the MA line also has some disadvantages as follows:
- It is necessary to apply MA lines on many time frames
- Ignore complex fluctuations
What is MA20?
The MA20 line is a type of MA line, representing price fluctuations over the last 20 trading days.
