Average indicator
Hello, everyone! Today I want to introduce you to one of the most popular technical indicators-moving averages (Moving Average, MA). It belongs to the trend indicators, and a huge number of other equally useful indicators are built on its basis.
The principle of building a moving average is extremely simple: the indicator calculates the average price for a certain past period of time and draws a line. The length of time is calculated in bars (candles), which you yourself set in the settings.
Let’s see the Moving Average indicator on the chart.
Open the MT4 terminal, click “Insert” in the main upper menu, then “Indicators”, select “Trend” and find the Moving Average:
By default, in the settings, the period is set to 14, which means that it shows the average price value for the last 14 (1… 14) bars. When a new bar is formed, the first one is excluded, and so the moving average moves on.
As mentioned above, it refers to trend indicators, so its task is to determine the future trend. How does it do it? If the price is above the moving average, the trend is up; if it is below, the trend is down.
The longer the specified period, the more bars are taken into account when constructing the moving average. As a result, we get a more significant trend, which should be given more attention.
Let’s add another moving average with a period of 200 and let’s make it blue:
What we see is that the price is below the moving average with a period of 200. There is a continuing downward trend. Although the 14-period moving average often signals a short-term uptrend, it calculates only 14 bars and reacts faster to price movements.
I think we figured it out. Let’s move on. Let’s dwell on the indicator settings in detail:
Everything is clear with the period. Now, what is the “MA Method”? This is by what method the moving average will be calculated.
I roughly drew how the moving average is calculated by different methods (with a period of 14):
Simple– A simple moving average gives equal weight to all bars from first to last.
Exponential – exponential moving average, which evenly reduces the importance of bars beginning with the most recent one, and more importance to the last bars, giving them more weight. In other words, because they are more sensitive to current prices, they react to price changes more quickly.
Smoothed: When smoothed, the average value of the price has more weight. The lowest price sensitivity justifies itself over long periods.
Linear Weighted: As it is linearly weighted, it attaches more importance, like exponential, to the last bars, but unlike exponential, it does it more pronounced, sharply, as it assigns different weights to the bars. Therefore, it is less popular among traders.
Now let’s display all moving averages with the same period of 50 on one chart:
Let’s compare all the moving averages with simple.
A smoothed moving average is less agile as if detached from the price, and even with short-term trends, it practically does not change its movement. Due to its low sensitivity to price, it shows a long-term downward trend.
Exponential is more sensitive, close to the current price, you can see how well it moves behind it.
The linearly weighted one reacts more sharply to the price; it goes lower than the exponential one as if stuck to the price, but works well on this chart as a dynamic level. I don’t know why traders dislike it so much.
Of all the moving averages presented, the most popular is exponential, so to speak, the favorite of traders.
The following “Apply to” settings:
When constructing a moving average, the average price of candles (bars) will be considered.
Close-close of the candle;
Open—opening of a candle;
High– the highest point of the candle;
Low – the lowest point of the candle;
Median Price ( HL/2) – average, between the high and low of the candle;
Typical Price (HLC/3): the average of the candle’s maximum, minimum, and closing prices.
Weighted Close ( HLCC/4) – weighted average;
Previous Indicator’s Data – apply the calculation of the average to the data of the previous indicator (if you have another indicator installed in the same window as the Moving Average);
Apply- the calculation of the average to the first indicator (if you have 2 or more indicators installed, in addition to the Moving Average, but want to apply it only to the first one).
They mainly use the application to “Close”, but this does not mean that you should act on the principle “like everyone else”, analyze, compare, develop your own approach.
The periods that are more popular with traders are 8, 21, 50, 100, and 200. If we compare them to the candles of the daily chart, we get 8 a little over a week, 21 months, 50 almost a quarter, 100 half a year, and 200 a year. But you can choose your own period empirically, depending on the currency pair.
Do not forget that moving averages are an indicator, and they lag (lags behind the price).
The longer the period, the stronger the lag will be. At the same time, they will often give false signals at short periods. Somehow, look for the golden mean. Yes, and 100% relying on it is not worth it.
I did not give formulas for calculating moving averages because I think this is superfluous. Many of you still do not understand anything in them. The main thing is the essence! The meticulous can easily find them in the indicator code. Join our Telegram channel for market updates.
How to trade using moving averages, you can learn from my article “How to trade using moving average indicator .”
