5 min read
Moving average (MA) it is one of the most used technical indicators, and for good reason – it is a simple and effective indicator.
The moving average is based on past prices and can be classified as a trend indicator. Measure the average price for a particular trading instrument over a specified period of time.
Its main function is to reduce the "noise" of the price and level the movement. In practice, the general idea behind the indicator can be represented by four different types: simple moving average (SMA), weighted moving average (WMA), exponential moving average (EMA) and simple smooth moving average (SSMA).
The two most commonly used variants of the moving average are simple and exponential. While SMA is a simple average of asset prices over a given period of time, EMA gives priority to more recent prices and gives it more weight. WMA also attaches the greatest importance to the most recent candle. SSMA does not focus on a specific time frame and is rarely used in trading.
SMA (orange) and EMA (yellow) with period 14 overlaid on the EUR / USD price chart
How to configure?
Here what you want to do to set the indicator on the IQ Option platform:
- Click on the "Indicators" button in the lower left corner of the screen, then choose "MA".
Indicator setting. First step
- Switch to the "Configure & Apply" tab.
Indicator setting. Second step
- Choose the type of MA desired, adjust the time period and click on "Apply".
As a rule, a simple moving average with a longer period of time is used to determine long-term trends, while short-term trends can be captured with an EMA from the lower period. The short term EMA will have a smoother appearance, while the long term SMA will appear smoother.
How to use them in trading
Despite being a basic technical analysis tool, the moving average has many practical applications in trading.
The most common is the identification of the existing trend. By smoothing the price movement and reducing noise, moving averages allow the trader to see the real image behind the sporadic price fluctuations.
MA can also be used as a dynamic support and resistance line. The basic principle is to sell when the price touches the moving average from below and to buy if the price is located above the MA line and approaches it slowly.
Definition of entry points with the help of the MA
But there's more, some rather sophisticated indicators like Bollinger Bands, MACD and Oscillator McClellan i rely on moving averages.
Being an indicator based on the past performance of the price movement, the moving average can not adequately predict the future direction of the trend, nor its strength. Of course this does not mean that MA is useless. By analyzing the past we can receive the information necessary for future forecasts. In other words, the MA can not make an accurate prediction, but it can help us to make the prediction in person.
The moving average is a simple but powerful tool and comes in many forms. Each of them is suitable for fulfilling its personal task. Do not let the simplicity of the moving average deceive you, this indicator requires a lot of practice to be used effectively.
Get practical experience
NOTES: This article is not an investment advice. Or any of these movements or levels are likely to be reoccur in the future.
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Source: IQOption blog 2018-11-02 07:55:39