Published on June 18th, 2018 | by admin0
Moving Averages Part 1: Which MA?
The moving average is without doubt one of the most popular trading tools available. The primary function of a moving average is to identify a trend and trend reversal. However, it also has other uses such as identifying potential areas of support and resistance and also measuring the strength of an assets momentum.
Moving averages are great as long as you know how to use them, which includes identifying which time frame you should be using and which moving average.
SMA vs EMA
The principal difference between the simple moving average and the exponential moving average is the speed with which each one responds to changes in the price. As the simple moving average gives the same weighting to all time periods used to calculate it, it is slower to respond to prices movements, so it takes longer to turn when the price turns. Whereas the exponential moving average gives more weighting to more recent time periods meaning that it responds faster to changes in the price.
Advantages & Disadvantages of SMA vs EMA
It is not that one is better, and one is worse as far as simple moving average and exponential moving average are concerned. However, be aware that each one’s advantage is also its disadvantage. As the exponential moving average reacts faster to price changes it means that it is also vulnerable to giving false signals. Meanwhile the simple moving average is much slower to respond but it is considered a more reliable indicator. It might get you into the trade later, but it can also keep you in traders for longer.
So when deciding which to use it depends on your trading style. Longer term traders or if you are using the moving average just for a general idea on trend, then the simple moving average is fine. If you are trading a faster market or shorter term, then an exponential moving average could be more useful.
The other point to consider is which time period setting to use. Simply if you are a short-term trader there is no point looking at the 200 moving average and also if you are a long-term trader the 10 moving average is also useless. As a general rule of thumb:
10 – 20 moving average is for short term trading.
50 moving average is medium term trading.
100 – 200 is long term trading.
Moving averages are simple to draw onto charts. Vantage FX offers its clients a comprehensive charting package on all of its platforms. This makes MA simple and easy to set up on the charts.
On MT4 quite simply:
Add indicator icon > Trend > Moving Average
Insert > Indicators > Trend > Moving average
It is then possible to select which moving average method, the time frame and the colour which it will be. Taking this a step further, you are also able to build levels of channels around the moving average.