Indicators and EAs in MT4

MT4 - How to Set Up a Moving Average

Strategy - Moving Averages - What type? period? what stops?

It's not about what moving average, it's all about the principle of using the moving averages.

Moving Average Forecasting: What You Need to Know

How do you spot developing investment trends? "Moving Average Forecasting" articulates three key steps for risk-averse investors. As part of the Strategic Investor Spotlight Series, "Moving Average Forecasting" teaches you how to opportunistically identify important financial market trend signals.

Moving Average Strategy Forex Trading

Moving average is one of the most widely used Indicator because it is simple and easy to use.

This Indicator is a trend following indicator that is used by forex traders for three things:

• Identify the beginning of a new trend
• Measure the sustainability of the new trend
• Identify the end of a trend and signal a reversal

The MA is used to smooth out the volatility of price action. The MA is an overlay indicator and it is placed on top or superimposed on the price chart.

On the example below the blue line represents a 15 period MA, which acts to smooth out the volatility of the price action.

Trading Short-term and Long-term Price Period of Moving Average

A trader can choose to adjust the periods used to calculate the moving average.

If a trader uses short periods then the MA will react faster to the changes in price.

For example if a trader uses the 7 day MA then, it will react to price change much faster than a 14 day or 21 day MA would. However, using short time periods to calculate the MA might result in the indicator giving false signals (whipsaws).

If another trader uses longer time periods then the MA will react to price changes much slower.

For example, if a trader uses the 14 day MA then the average will be less prone to whipsaws but it will react much slower.

Types of Moving Averages SMA, EMA, LWMA and SMMA

There are 4 types of moving averages:

1. Simple moving average
2. Exponential moving average
3. Smoothed moving average
4. Linear weighted moving average

The difference between these 4 moving averages is the weight assigned in to the most recent price data.

Simple Moving Average - SMA

Simple moving averages apply equal weight to the prices used to calculate the average

Simple moving average is calculated by summing up the price periods of a financial instrument and this value is then divided by the number of such periods. For example simple moving average 10, adds price for the last 10 periods and divides them by 10.

Exponential Moving Average - EMA

Exponential moving averages apply more weight to the most recent price data.

Exponential moving averages are calculated by assigning the latest price values more weight based on a percent P, multiplier that is used to multiply and assign more weight to the latest price data.

Linear Weighted Moving Average - LWMA

Linear weighted moving averages apply more weight to the most recent price data.

Linear weighted moving average - the latest data is of more value than earlier data. Weighted moving average is calculated by multiplying each of the closing prices within the price series, by a certain weight coefficient.

Smoothed moving average - SMMA

The smoothed moving average is calculated by applying a smoothing factor of N, the smoothing factor is composed of N smoothing periods.

The example below shows SMA, EMA and LWMA. The smoothed moving average is not commonly used so it is not shown below.

The Linear weighted moving average reacts fastest to price data, followed by the exponential moving average and then the SMA.

Day Trading with Exponential moving averages and simple moving averages

The moving averages most commonly used are simple moving average (SMA) and more and exponential moving average (EMA). Whereas the EMA has a more sophisticated method of calculation, its more popular than the SMA moving average.

SMA is the arithmetic mean of the closing prices in the period based on the set time period where each time period the price is added and then it is divided by the number of time periods chosen. If 10 is the period used the price for the last ten periods added up then it is divided by 10.

SMA is the result of a simple arithmetic average. Very simple and some forex traders tend to associate with the forex trend since it closely follows price action.

EMA on the other hand uses an acceleration factor and it is more responsive to the trend.

The SMA is used in price charts to analyze price action relative to the SMA. If the price action in more than 3 or 4 time periods show below the SMA then its an indication that long trades should be closed immediately and the bullish momentum is waning.

The shorter the SMA Price action period the faster the SMA is to respond to price change. SMA can be used to show direct information regarding the trend of the market and the strength by looking at the slope of the SMA, the steeper or more pronounced slope display is, the stronger the forex trend.

The EMA is also used by many traders in the same way as the SMA but it reacts faster to price action and therefore preferred by some traders.

The SMA and EMA can also be used to generate entry and exit points. These Moving averages can also be combined with Fibonacci and ADX indicator to generate confirmation signals. Most day traders use 5- 10 period moving average.

Technical Analysis of Moving Average Forex Indicator

Forex Trend Identification

The moving average can be used as an indicator for generating Forex trading signals. A buy or sell Forex signal is generated when price either moves above or below the moving average, respectively.

If the MA is heading upward in diagonal manner then the general Forex market trend is upwards.

If the on the other hand the MA is heading downwards in diagonal manner then the general Forex market trend is downwards.

Upward Forex Trend/Bullish Trend

If the MA is moving up, then the trend is upwards and the signal generated is a buy/bullish signal.

As long as the price location is above the moving average then the Forex trend will remain as an upward trend. The moving average will act as a “support level” and price action of the chart candlesticks should not close below the MA.

Moving Average Buy Signal

When the price moves above the MA and closes above the moving average, a buy signal is generated.

Forex Traders, who want to confirm the trade signal before implementing it, should wait until the MA line turns and starts to move in an upward direction. It is always best to wait for the confirmation signal so as to reduce chances of a whipsaw.

Downward Forex Trend/Bearish Market

If the MA is moving down, then the Forex trend is downwards and the signal generated is a sell/short signal.

As long as the price location is below the MA then the trend will remain as a downward bearish Forex trend. The MA will act as a “resistance level” and price action of candlesticks should not close above the MA.

Moving Average Sell Signal

When the price moves below the MA and closes below the moving average, a sell signal is generated.

Traders who want to confirm the signal should wait until the MA line turns and starts to move in a downward direction. This will reduce the chance of trading a whipsaw.

Range Market signals

Range Market signals can also be identified using the MA. Range Market signals will be illustrated in the next lesson.

Moving average crossover method

Moving average crossover method is also another Forex trend generation method that is more favored by the Forex traders compared to the above signal generation method. It is also the simplest form of a Forex trading system widely used by traders. This MA crossover method is combined with other Forex technical indicators to form more complex Forex trading systems.

Moving Average Whipsaws in Range Market

The MA is a useful indicator to trade with when a trend has formed. However the indicator is prone to whipsaws when the price is trading in range market.

The MA is prone to whipsaws during a ranging market because the price is volatile and keeps moving around the average, causing the indicator to give signals indicating upward trend and then quickly changing to give sell signals.

It is for this reason that the MA should not be used to trade in a range based market.

Ranging Market & Whipsaws

This is why it is best to combine this indicator with other indicators when generating trading signals to trade currencies with.

Moving Average Crossover Method

The cross over method uses two moving averages to generate trading signals. The first MA is a shorter period MA and the second average is a longer period MA.

This method is referred to as the crossover method because signals are generated when the two averages cross each other.

A buy is generated when the shorter MA crosses above the longer MA.

Sell signal

A sell is generated when the shorter MA crosses below the longer MA.

Buy and Sell signal

The above system is the most simplest of all systems that traders use to trade currencies.

Moving Average Support and Resistance Levels

Moving Averages can be used as points of support and resistance.

When price reaches the moving average, the MA level can act as a point of support or resistance for the price.

Buy Signal

If price is on an up trend and starts to retrace, then most traders might wait to buy at a better price when the price hits a support level. Traders will sometimes use the MA to determine the support level.

A buy signal is generated when price hits the MA, turns and starts moving in the upward direction. The signal is confirmed when price closes above the MA. Because many traders use the moving averages to generate trading signals, price will normally react to these levels.

A stop loss should be set just below the MA. Ideally it should be set a few pips below the previous low.

Sell Signal

If price is on a down trend and starts to retrace, then most traders might wait to sell at a better price when the price hits a resistance level. Traders will sometimes use the MA to determine the resistance level.

A sell signal is generated when price hits the MA, turns and starts moving in the downward direction. The signal is confirmed when price closes below the MA. Because many traders use the moving averages to generate trading signals, price will normally react to these levels.

A stop loss should be set just above the MA. Ideally it should be set a few pips above the previous high.

Resistance turns support

When a resistance is broken it turns into support and vice versa.

This happens when the fundamentals of a currency change and consequently the direction of a currency pair. The direction change is reflected by the moving average, the direction is confirmed when the resistance turns into support or vice versa (when support turns into resistance)