Moving Averages – It is really significant that while measuring a trend of the market, we need a tool called moving averages in order to analyze its direction and momentum. There are certain best methods of creation of moving averages and are much simple. We all know that the market has its own average and whenever the current prices are below or above the market average value, we try to reset or stabilize the market by calculating the moving averages. We try to give a particular momentum to the market and hence, a direction. Though the time period included in the calculation of the moving averages is very large, it becomes mandatory for us to take the time arbitrarily.
Purpose of using moving averages.
It has often been seen that when the market requires some direction or the liable momentum in a period of time, the technique of moving averages always finds its use. It not only stabilizes the market but also gives a direction for the future trend. There is no denying the fact that it is considered the most effective and vital marketing gauge in order to crystallize the marketing trend.
Types of moving averages.
Simple Moving Average
It is one of the most basic tools that divide sum of all the closing points/prices of the marketing trend over a set period of time by the time period that is included to survey the trend in the given market. Thus, it reaches at the indicator value, without using any weightage and smoothing factor.
Exponential moving average.
In this method, moving averages are calculated exponentially. This method gives a far better idea about the prices and the current marketing trends without compromising with the instability of the market. It gives a greater value to the marketing prices. The method includes the concept that when we move to the left of the chart i.e. towards the past values, the values of the moving averages decreases rapidly as compared to the reduction as it would have been in linear computation process. So, in determining the value of the market indicator we are ought to find the more significant present price.
Smoothed moving average.
No doubt, this type of moving average determines the most reliable momentum and trend of the market in the future. Unlike the exponential moving average, smoothed moving average includes even the earliest price scores from the chart although has low weightage in calculation of the indicator value. This process, in fact, removes the short term volatility of the market and helps in price action smoothening. Hence, it is recommended to calculate the smoothed moving average in order to know the long term behavior of the marketing trend and its momentum. In this process, earliest values of the chart plays a role but to a smaller scale.
Linear regressed moving average.
This type of moving average is not exponential but it is linear in nature. While it is being calculated, it is seen that the latest fluctuations in the market are given more weightage. The earliest period (n) cost is multiplied by1, the corresponding period (n-1) is multiplied by 2 and the following time period (n-2) is multiplied by 3 and so on. The above method depicts that in this way the present time period is given more weightage and depicted with more clarity. So, with this method of finding the moving average, we can analyze the trade decisions in the future with the latest fluctuations, rise or fall in the market.
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Using the moving average.
While we use the types of moving averages, there are many strategies that are implied in calculating the marketing direction and momentum. But, here we will discuss the three basic methods that lie at the roots of different strategies.
Crossovers are taken into account when the prices fall or rise above the marketing value or the moving average. It shows or indicates the end or the beginning of a new trend for the existing market. Since the occurrences like crossovers are general and, so it does not guarantee for the market evaluation process. Though there are many technical difficulties in the marketing trading yet crossovers alone cannot be used. These are used with the combination of the other marketing tools in order to evaluate the price action with more confidence and clarity.
Moving Average Trends.
It has been often seen that moving average has its own trends apart from that of the price action trends. The analysts always reap the benefits of these trends in moving averages at the entry/exit level. Though price action trend is not sufficient to calculate everything about the present market but when it is used with the moving average trends, it may prove to be much beneficial in order to better analyze the price action trend of the market.
Both of these properties of a market depict the possibility of a future reversal. The ascendance of the trend and descending of the moving average give rise to the phenomenon of divergence. On the other hand, when the moving average registers high values contradicting the bearish market trend, convergences comes into effect. It is always considered a good time to open a counter-trend status when the market is ought to run out of energy, in case the indicator values contradicts the price action in this volatile market.
The public should not be sure for the future reversal of the market and the timing remains always uncertain. Anticipation of the coming market reversal may take a long time or may never occur. In such a market where trend is very strong and rough, it becomes common to see the phenomenon of divergence/convergence that does not bring any change to the market or the process of market reversal remains unaffected. In spite of its irregularities, it will remain the most popular yet the rarest technique to evaluate the moving averages in this modern time.
The term MA Hopping is used when the various moving averages are used as the resistance levels for the price action to breach. There is no denying the fact that using this we may get a continuous trend in the market and therefore, opening a position may get easier. Calculations based on the hourly basis like breach in 1 hour, the next in 5 hours and similarly in 10 and 40 hours help us to determine the indicator values. This process always occurs in succession and helps in maintaining the positions as the price hops between the different levels.
We are ought to examine and each and every method while discussing the various types of moving averages. You may visit the corresponding page in order to learn more about these calculations.
Moving Average Conclusions.
Talking about the weaknesses of the moving average, we see that it is of lagging nature. If long term changes are not taken into account, the short lived fluctuations in a market end in the time the process takes to resolve the issue or give you an edge on the present fluctuations. It may happen that the changes have ended. The moving average sets up a market pattern and if that is short lived, we may suffer whipsaws with a loss.
The positive things with this method are the properties of moving average like simplicity, clarity and the ease to use it. The methods of moving average may be used in all the strategic indicating points of the market and it is a great tool that does not depend on the market type or any market place.