Good day to all.
Today’s lesson is about how can we make use of a moving average indicator.
A moving average indicator simply plots a line using the average of a specified period.
For example, a 10 Simple Moving Average (SMA) indicator, will plot a line using the average of the sum of the 10 preceding candles.
( C1+C2+C3+C4+C5+C6+C7+C8+C9+C10 ) / 10 = plotted price.
The most common use of a moving average indicator is as an indication of trend.
Sloping up = Bullish
Sloping down = Bearish
It is also used as a support and resistance prediction.
Notice how the price often respects the line while it is still trending.
Besides the SMA, another common moving average indicator will be the Exponential Moving Average (EMA) indicator.
EMA gives a higher weightage to recent prices and this will result in a more responsive indicator.
Notice that it reacts faster to prices in the circled areas?
This is the benefit of it.
A faster responding indicator will give you more time to react to situations.
After all, you won’t want to be stuck in a trend when it has already ended right?
It is also worth noting that the longer of period used, the slower will be for the indicator to react.
Previous performance can never predict the future experience.
Therefore, we should not rely entirely on moving average indicators to make trading decisions.
An adverse development in the world stage can totally change the trend of a currency pair without warning.
Personally, i use moving average indicators, to prevent me from entering against the trend.
It is never the sole reason for me to enter into a position.
Common periods used are 10, 20, 50, 100, 200.
Longer periods are used for long term positions.
Most trading software should have this indicator ready and hence it shouldn’t be a problem.