FOREX Money Trader
FOREX Money Trader
Our Site is dedicated to providing as much straight forward information
as we possibly can without all the extras hype. Currency knowledge
that's empowering.
MLD
Our Site is dedicated to providing as much straight forward information
as we possibly can without all the extras hype. Currency knowledge
that's empowering.
MLD
| Foreign Currency Exchange Information: Moving Averages |
| Moving Averages |
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| Copy Right 2008 |
| Working with this program now. Seems to work well. Have made back my investment in the program so I figure its paid for itself. Give it a shot! |
| "Currency Knowledge That's Empowering" |
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Moving averages of all types are a primary tool in technical analysis. Moving averages can be a starting point
and an ending point for the trader, as they can provide trending, buying and selling signals quite successfully.
While I would always suggest considering more than one type of indicator when deciding on a trade, these can be
the basis from which you then consider other indicators for confirmation.
An average is the sum of so many numbers divided by the number of numbers, as you probably know. When it
comes to charting, there are many ways of putting this simple idea to work, and the different ways have different
characteristics and uses. All moving averages have the effect of smoothing out the price patterns, and they are all
lagging indicators – that is, they are based on previous values, and have no direct predictive abilities. This is also
called trend-following. Consequently, they tend to work better for prices that are trending.
The basic line, which is called the simple moving average, is drawn by averaging the price for the last ten days (or
however many price bars you choose) and plotting the point today. It is usual, but not required, to take the closing
prices when calculating the average. As each day passes, the average is changed by dropping the oldest price
and including the latest. This is a fundamental function available on all charting programs, so you do not have to
calculate it.
When moving averages originally became popular, back in the 1930s, they often used a period of ten days, as this
represented two working weeks, and was a manageable size for hand calculation. Nowadays, you can demand
thirteen days, forty-six days, or anything else that you feel is optimum from your software. The periods that are
commonly used are 10, 20, 30, 40, 50, 60, 100 and 200, although you would certainly not choose to use them all
together. A twenty day simple moving average would be referred to as SMA20.
The first way that a moving average can be used is simply called the crossover rule. When a price is trending
downwards, the price will always be under the moving average line. When the price rises above the line, this is a
sign that the trend has reversed, and you buy the security expecting it to rise. You can apply the same idea to
selling, waiting for the price to drop below the line before selling or going short. While this method has the merit of
simplicity, you will find that it tends to encourage too much trading, as trends sometimes don’t materialize and you
buy only to find the price stays low. The signal from this system also lags by a few days from the ideal time.
Traders often use the SMA20 for this, but you can affect the performance by trying different periods.
There are some variations to the SMA available, and these have been invented to try to reduce the lagging
problem. The most common alternative is called the exponential moving average, or EMA, which is fortunately
available on charting programs, as it involves multiplying differences by smoothing factors. The others are the
weighted moving average (WMA), which places more emphasis on recent prices by using multiples of them to make
up the average, and the adaptive moving average (AMA), of which there are several versions, and these attempt to
adjust for the volatility of the prices to give a more effective line.
A second way that the moving average may be used for a trading signal is called the level rule. This involves
looking only at the moving average, and trading when it changes direction – from up to down to show a downtrend,
or from down to up to signal an uptrend. Of course, this too lags the price direction, but serves to smooth the
triggering of a trade.
Moving averages can seem to be very impressive when plotted on some charts, but they do have some problems –
if there is no significant trend, then the average does not help you to trade, and they suffer from price volatility, or
noise, in the prices which can give false triggers.
A third way that moving averages can be used is by having more than one on a price chart. The moving average
based on fewer periods responds quickly, but may give more false signals when used singly than one based on
more prices. However, if you use two moving averages together it is common to take the signal as the crossing
over of the averages, and not just one price crossing the line. This filters out the wild prices that would otherwise
trigger a trade that may not be supported by the trend. The technique is to buy when the shorter term moving
average crosses above the other, for instance, when the SMA5 rises above the SMA20. These are values that are
frequently used, but again can be altered to find what works best for the particular security. The two moving
average crossover gives less false signals than the single, as it is less sensitive. It lags the price movement even
more, but may be preferred because it is wrong less often. You can even experiment with three moving averages,
taking your trading point as the short term crossing either of the others, for instance.
Finally, as an example, it is possible to set up a complete trading system using moving averages as follows. Use an
SMA20 with the crossover rule to signal a trade, either long or short, when the price goes above or below the line.
Use an SMA40 as a moving stop loss to protect your profit – if the price drops to this line, then you would close out
a long trade. If you add an SMA60 to the chart, you can take the crossing of this by the shorter term averages as a
strong reversal signal – this would have you thinking of a short trade instead of a long trade, for instance. Many
traders will also use an EMA200 to give a long term view of the price, and confirm the major trends.
and an ending point for the trader, as they can provide trending, buying and selling signals quite successfully.
While I would always suggest considering more than one type of indicator when deciding on a trade, these can be
the basis from which you then consider other indicators for confirmation.
An average is the sum of so many numbers divided by the number of numbers, as you probably know. When it
comes to charting, there are many ways of putting this simple idea to work, and the different ways have different
characteristics and uses. All moving averages have the effect of smoothing out the price patterns, and they are all
lagging indicators – that is, they are based on previous values, and have no direct predictive abilities. This is also
called trend-following. Consequently, they tend to work better for prices that are trending.
The basic line, which is called the simple moving average, is drawn by averaging the price for the last ten days (or
however many price bars you choose) and plotting the point today. It is usual, but not required, to take the closing
prices when calculating the average. As each day passes, the average is changed by dropping the oldest price
and including the latest. This is a fundamental function available on all charting programs, so you do not have to
calculate it.
When moving averages originally became popular, back in the 1930s, they often used a period of ten days, as this
represented two working weeks, and was a manageable size for hand calculation. Nowadays, you can demand
thirteen days, forty-six days, or anything else that you feel is optimum from your software. The periods that are
commonly used are 10, 20, 30, 40, 50, 60, 100 and 200, although you would certainly not choose to use them all
together. A twenty day simple moving average would be referred to as SMA20.
The first way that a moving average can be used is simply called the crossover rule. When a price is trending
downwards, the price will always be under the moving average line. When the price rises above the line, this is a
sign that the trend has reversed, and you buy the security expecting it to rise. You can apply the same idea to
selling, waiting for the price to drop below the line before selling or going short. While this method has the merit of
simplicity, you will find that it tends to encourage too much trading, as trends sometimes don’t materialize and you
buy only to find the price stays low. The signal from this system also lags by a few days from the ideal time.
Traders often use the SMA20 for this, but you can affect the performance by trying different periods.
There are some variations to the SMA available, and these have been invented to try to reduce the lagging
problem. The most common alternative is called the exponential moving average, or EMA, which is fortunately
available on charting programs, as it involves multiplying differences by smoothing factors. The others are the
weighted moving average (WMA), which places more emphasis on recent prices by using multiples of them to make
up the average, and the adaptive moving average (AMA), of which there are several versions, and these attempt to
adjust for the volatility of the prices to give a more effective line.
A second way that the moving average may be used for a trading signal is called the level rule. This involves
looking only at the moving average, and trading when it changes direction – from up to down to show a downtrend,
or from down to up to signal an uptrend. Of course, this too lags the price direction, but serves to smooth the
triggering of a trade.
Moving averages can seem to be very impressive when plotted on some charts, but they do have some problems –
if there is no significant trend, then the average does not help you to trade, and they suffer from price volatility, or
noise, in the prices which can give false triggers.
A third way that moving averages can be used is by having more than one on a price chart. The moving average
based on fewer periods responds quickly, but may give more false signals when used singly than one based on
more prices. However, if you use two moving averages together it is common to take the signal as the crossing
over of the averages, and not just one price crossing the line. This filters out the wild prices that would otherwise
trigger a trade that may not be supported by the trend. The technique is to buy when the shorter term moving
average crosses above the other, for instance, when the SMA5 rises above the SMA20. These are values that are
frequently used, but again can be altered to find what works best for the particular security. The two moving
average crossover gives less false signals than the single, as it is less sensitive. It lags the price movement even
more, but may be preferred because it is wrong less often. You can even experiment with three moving averages,
taking your trading point as the short term crossing either of the others, for instance.
Finally, as an example, it is possible to set up a complete trading system using moving averages as follows. Use an
SMA20 with the crossover rule to signal a trade, either long or short, when the price goes above or below the line.
Use an SMA40 as a moving stop loss to protect your profit – if the price drops to this line, then you would close out
a long trade. If you add an SMA60 to the chart, you can take the crossing of this by the shorter term averages as a
strong reversal signal – this would have you thinking of a short trade instead of a long trade, for instance. Many
traders will also use an EMA200 to give a long term view of the price, and confirm the major trends.