" /> Moving Average (MA) is one of the most popular and long-standing indicators used in trading on financial markets.
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It was first used during World War II. The creators of Moving Average are Richard Donchian and J. M. Hurst.
Formula for Moving Averages
The Simple or Arithmetic Moving Average is calculated as the sum of closing prices of an asset over a certain number of periods or candles (e.g., 9 or 26 days), divided by the number of periods.
SMA = SUM (CLOSE (i), N) / N, where:
- SUM – sum;
- CLOSE (i) – current period’s closing price;
- N – number of calculation periods.
Types of Moving Averages
There are various types of the Moving Average indicator. For technical analysis of the market, simple, exponential, smoothed, and weighted moving averages are used.
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- Simple Moving Average (SMA) is the sum of closing prices of an instrument over a specified number of periods, divided by the number of those periods. This is the most basic indicator, which calculates just the average value over a number of bars without considering historical depth. Therefore, this moving average is considered lagging.
- Exponential Moving Average (EMA) gives more weight to bars closer to the current price. EMA adds a portion of the current closing price to the previous moving average value, experts from fortraders.org note. In the calculation of the smoothed average, more weight is also given to the market closing price. This is the most popular version of the moving average—it lags less and is not as sharp as WMA.
- Linear Weighted Moving Average (WMA) is the most active indicator in the family. It reacts faster to price changes, so it provides many false signals. Traders usually do not use it.
More about the indicator calculations
Parameters of Moving Averages
Period of the Moving Average
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The period is the most important parameter of the moving average indicator. It shows how many bars are taken into account. The higher the value, the smoother the indicator line will be.
Short periods of the moving average are best used on low timeframes, as they consider the current situation and allow traders to react quickly. However, such a filter can give many false signals.
If the period is too large, it will lag significantly and show old history that may no longer be relevant. Such an indicator is often used as a long-term support or resistance level.
- For short-term trading — 6, 9, 13, 21, 26;
- For medium-term trading — 30, 50, 62;
- For long-term trading — 100, 144, 200.
These numbers reflect important day counts in a year.
Apply to…
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Another important parameter that can change the look of the moving average is ‘Apply to’—the opening price, closing price, or other bar calculations. There are many options, but they don’t significantly affect the indicator display. Perhaps this parameter plays some role in scalping, but not in long-term trading. The most popular method on forex is close.
How to Trade Using Moving Average
Moving Average is a trend indicator, so trading strategies based on MA are primarily trend-based. Traders come up with different signals, but there are three main ones.
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- The general direction of the indicator shows the current trend. Depending on the period, the trend can be short-term, medium-term, or long-term. If the moving average points upward, it indicates an uptrend; downward means a downtrend; and horizontal means a flat market.
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FAQ
What is a Moving Average (MA)?
A Moving Average is a trend indicator that smooths price data by calculating an average over a specific period, helping traders identify trend direction.
What are the types of Moving Averages?
The main types are Simple (SMA), Exponential (EMA), Smoothed, and Weighted (WMA), each with different ways of calculating and weighting price data.
How is the period of a Moving Average used?
The period determines how many bars are considered in the calculation. Shorter periods react faster to price changes, while longer periods provide smoother, lagging signals.
