Trend Indicators: Types of Moving Averages

Considering that forex chart combines several characteristics at a time – primary deposit amount, currency price and time for trading we should define the basic task: how much time should we need to make profitable transaction with certain deposit amount. To answer this question we should pay our attention at the most important technical trend indicator – moving average. Trend indicators serve to identify trend – whether it is rising or falling or flat i.e. sideway. Perhaps from all the variety of trends technical indicators the most objective means to define trend are moving averages (mA). These curves reflect dependence between currency rate and time changes. On MetaTrader4 you can apply moving averages on various periods (sometimes they are called periods of moving averages). Period of moving line is called the number of bars on chart depending on closing price of bar from time of averaging. Thus for example there is a rule: to buy on ascending trend when chart crosses price of moving average, and sell on descending trend when prices chart crosses moving average downward. However this rule may be false that’s why the most often more complicated model is used: to define prices chart cross with three moving averages with various periods. At intraday trading it is safe to use moving averages with periods 5, 13, and 34. Period 5 means that price averaging is conducted on 5 previous bars i.e. moving average is a flattering line for prices of five previous bars on chart with chosen by you time period. Which charts are most appropriate for intraday trading? You will find about it below. And now let us take a closer look at moving averages. There are 3 types of them: 1. Simple moving averages that are determined by formula:nnmA=1/n x sum P,n nwhere P – is price of i-bar, and n is moving period This formula is rather simple and clearly shows prices flattering on chart. However, its disadvantage is that all bars in it are equivalent that is far from the reality indeed. As the last bar may differentiate by value from the first one in certain order (say in period 5 the first bar had different closing price from the fifth one), bar weight within period should decrease left to right considering input of the last bar that is in determining trend is more important than previous bars. This principle expresses weighted moving average. 2. Weighted moving average is determined by formula: MA=1/ (sum W) x (sum PW), Where P – price of i-bar, W – weight of i-bar, and W(i)>W(i-1). This formula shows that the last bar in period has greater weight and as a consequence – more information providing certain retard decrease. 3. There is exponential moving average that is calculated according to a special recurrent formula. While calculating exponential moving average older prices have lesser importance and recent – bigger importance. Which of these moving averages is the best to be used and in which cases? There are opinions that on long-term market – from one day and more – the most effective is simple moving average. For short intraday time periods from minute to hour it is better to use exponential moving average. But there are no unambiguous opinions about it. However effectiveness of moving averages may be increased if you use in calculations the choice of moving average period. For one day chart in trend analysis periods 8, 13, 21, 55, and 89 are used. On 15-minute and lesser intervals of prices chart the most effective moving averages are applied with periods 5, 13, and 34. The best indicator of trend is the line of moving average with period 34 on daily chart. With period increase grows also information about prices and market behavior retard which may lead to unreasonable losses and profit lack. However increase of moving average period serves as support or resistance line on prices chart. Moving averages crossing serves a guideline for entering the market. nnFOREX Ltd.