You cannot find all the information needed in one spot, instead you will have to collect fragments of knowledge. Here we will explain what Moving Averages are and how you can use them in practice. For more detailed information check out the given link.
The definition
Moving Average is the indicator of a trend. It sums up all the price data points to smooth it up into an average price. In MetaTrader (this is a trading platform) there can be four types of Moving Average and to distinguish them from one another you will have to learn their features.
Types of Moving Averages in MetaTrader:
- Simple – it is pretty common for traders to use Simple Moving Average. It adds recent prices, sums them up and divides by number of time periods in the existing chart. For instance, we have a 20-day Moving Average. We calculate the sum of 20 most recent prices and divide them in 20. That is the simplest method to find the average price.
- Exponential and Linear Weighted – they both have a similar calculating system. They add up all the prices with a higher coefficient. Because of that, both Exponential and Linear Weighted are more focused on the most recent prices data points than Simple MA. Just be careful, some of the fast signals may be fake due to the speed.
- Smoothed – this type is built from Simple MA. It compares recent prices to the previous, taking into account not only current prices, but all the available data. The Smoothed MA calculates the prices from the longest period if in the Simple Moving Average the oldest prices are deleted as new prices enter the equation. By doing so, you can eliminate price fluctuations and define the trend the best way possible.
You don’t need to download a separate app for that, the MA is already installed in MetaTrader. You can find information about how to find and activate it in the link provided above.
Why you should or shouldn’t use Moving Average in your trading
There are some pros and cons of using it, including:
- Pros – MA is considered to be more than an indicator. It is a multifunctional tool which is part of other indicators as well. You can find MA in such tools as Alligator, Bollinger Bands, Ichimoku Kinko Hyo. Because of its simplicity, it is quite popular.
- Cons – MA technology calculates the future price change based only on current price information. It does not take into account the sudden appearance of new competitors, changes in the demand for the product, and so on.
If the price is not moving in any direction, MA cannot predict when you can get a profit from buying or selling.