Published on June 19th, 2018 | by admin0
Moving Averages: Which MA?
Moving averages are by a long shot the most popular trend analysis tool available to traders. Once understood, moving averages are so simple to use but can give so much information.
Moving averages can be used to just to gain an idea of the trend in the market or they can be used more specifically for indicating entry and exit points along with stops and profit takers.
However, before you start using moving averages it is a good idea to have a broad understanding of a few key points, such as which time frame to use and which moving average is best suited to your trading strategy.
When using the moving average, it is first a good idea to understand which time frame you will use. If you are a short-term trader, the 10 -20 moving average is useful. If you hold your trades for a medium amount of time and you consider yourself a medium-term trader, it’s best to consider 50 moving average and if you are a long-term trader, then consider the 100 – 200 moving average. The point here being, there is no sense whatsoever in looking at the 200-day moving average if you are a scalper. Use the time frame that is relevant to your trading.
Different Types of Moving Averages
The other point to question, is which moving average? There are 3 principal types:
- Simple moving average
- Exponential moving average
- Weighted moving average
To understand the difference between these, its best to first understand how the simple moving average is calculated.
For example, a 20-day simple moving average, takes the closing price from the last 20 days and finds the average. All days are given equal weighting. However, with the weighted moving average or the exponential moving average more weighting is given to the more recent time periods. This means that the weighted and exponential moving averages are faster to react to changes in the price. Simple moving averages are slower to react to changes in the price, but the signal is considered to be more reliable.
So, if you are considering trading a faster moving market, exponential or weighted moving averages could be more appropriate. However, it you are looking to trade longer term on a slower moving market, the simple moving average would be a more appropriate option. Also, if you were just looking to get an idea of the general trend in a market, then again, the simple moving average would be the appropriate moving average indicator.
Regardless of which moving average you decide is appropriate, they are all simple and quick to apply. Almost of charting packages will offer simple, weighted and exponential moving average indicators. You as the trader will need to select the timeframe you are interested in and the colour you are looking to use for the indicator and then the charting package will simply add it to your chart.