The moving average (MA) is a simple technical analysis tool that smooths out price data by creating a constantly updated average price. The average is taken over a definite period of time. You can use a certain number of weeks, days, minutes, or any time period. There are advantages to using a moving average in your trading, as well as options on what type of moving average to use. Moving average strategies are also popular and can be tailored to any time frame, suiting both long-term investors and short-term traders. A moving average (MA) is a widely used technical indicator that smooths out price trends by filtering out the “noise” from random short-term price fluctuations.
Traders often use MA indicator to make informed decision whether to call or hold. The Pocket Option trading platform offers MA among many other standard indicators and oscillators.
How MA is calculated and preset?
A moving average helps cut down the amount of noise on a price chart. Look at the direction of the moving average to get a basic idea of which way the price is moving. If it is up, the price is moving up. If it is down, and the price is moving down. If it is moving sideways, and the price stays in the range.
A moving average can be calculated in different ways. For example, a five-day SMA adds up the five most recent daily closing prices and divides it by five to create a new average each day. Each average is connected to the next, creating the singular flowing line.
If you want to change the default settings and apply your own ones, click on the pencil icon next to the indicator and specify the selected value in the appropriate field.
As a rule, Moving Average is used as a trend line and characterizes three main market conditions:
- Uptrend: the candles are above the MA which is moving up;
- Downtrend: candles are under the MA which is moving down;
- Flat – candles are located inside the MA.
It is simple to read the chart and understand MA signals. Remember to check the default settings to understand what timeframe you use. For example, for the shorter timeframes (less than M15), the value 21 is suitable but for the timeframes from M30 to H4, you should use 50, and for the higher (more than D1) – 100.
How to trade Moving Average?
There are many strategies that rely on moving average. Experts advice using the tool in combination with other indicators and oscillators.
Experienced traders know the most popular method is to buy a contract at the intersection of two moving averages. A combination of MA 14 and MA 21 is considered to be universal.
At the same time, the MA14 is often used as a signal. Another strategy is to apply two moving averages to a chart: one longer and one shorter. When the shorter-term MA crosses above the longer-term MA, it’s a buy signal, as it indicates that the trend is shifting up. Meanwhile, when the shorter-term MA crosses below the longer-term MA, it’s a sell signal as it indicates that the trend is shifting down.
The rules for trading with MA are as follows:
- CALL option when the MA14 crosses MA21 goes up;
- PUT option when the MA14 crosses MA21 goes down.
Regardless of the timeframe, the expiration should be at least two candles.
Moving averages are calculated based on historical data, and nothing about the calculation is predictive in nature. Therefore, results using moving averages can be random. Moving averages work quite well in strong trending conditions but poorly in choppy or ranging conditions. A moving average simplifies price data by smoothing it out and creating one flowing line.
Adjusting the time frame can remedy this problem temporarily, although at some point, these issues are likely to occur regardless of the time frame chosen for the moving average(s).