Moving averages are one of the most useful tools for technical analysis. In this article from Digital Currency, using an essay From the Inostopedia website as well an essay As Rolf Schlotmann, forex trader and co-founder of the Tradeciety website, publishes on this website, we explain how to use this tool in your trading.
What is the moving average?
In statistics, moving average is a computation in which a number of subsets are selected from a larger set of data and averaged from them to be used for data analysis.
But in finance, the moving average is an indicator in technical analysis that is used to analyze financial markets.
Simply put, a moving average is a line drawn on a chart so that we can guess price behavior more accurately from past data.
The reason for calculating the moving average of a stock or asset is to help read price data better by calculating an average price that is constantly updated. By calculating the moving average, the effect of random and short-term fluctuations on the analysis is reduced.
To calculate the moving average, after setting the time frame (timeframe), the moving average period must be specified. For example, in a moving average of 20 periods, a price is selected from each of the previous 20 candles and their average is calculated. The price chosen from each candlestick depends on the user. You can choose the opening price (O), closing (C) candle or the average of the two. Even the highest (H) and lowest (L) candlestick prices can be used to calculate the moving average.
The good news is that you do not need to calculate the moving average yourself. The Trading View website draws a moving average line for you with a few simple clicks.
How to use moving averages in trading views
To use the moving average on the TradingView website, select the moving average (2) as shown in the indicators below (1).
After doing this, a default moving average will be displayed on the chart. Using the indicator settings option (3), you can apply the desired changes to it. For example, from the “Length” section you can change the moving average period (for example) 20 (4) and from the “source” section you can select the price of the candlestick that is used to calculate the moving average (5).
Exponential moving average or simple moving average?
First of all, we need to know that the difference between the exponential moving average (EMA) and the simple moving average (SMA) is not so great. The following diagram shows the exponential moving average of 50 periods as well as the simple moving average of 50 periods; You can see that these two moving averages are very close to each other.
Therefore, it is not possible to say which moving average is better, especially when considering other points.
Cope with the flaws!
This is the most important principle you need to keep in mind for any successful trading strategy. Sometimes the exponential moving average works better, and sometimes a simple moving average works better. Sometimes both work well, and in some cases neither works well.
Most novice traders lose all their capital to achieve a 90 to 95% winning rate. Rookies try to avoid losses at all costs.
But professionals agree that their trading system may not have a high winning rate; Instead, it allows them to trade profitably and reduce losses by setting the right limit.
Moving average strategy in different timeframes
Moving averages can be used in a variety of ways. One of the uses of moving averages is to better understand larger timeframes. In the image below, you can see a moving average of 50 cycles (blue line) from a daily chart. Timeframe (time interval) This moving average is one hour and the daily moving average helps us to better follow the general direction of the trend.
In this whole picture, the price is above the 50-day moving average. Therefore, the price as a whole is going up in the long run.
When the overall trend is bullish and long-term, trading becomes easier when the price rises in the short term; Because the trader does this in line with the general direction of the trend in the larger timeframe. In the image below, the upward trend on the left moves in a smoother direction without much fluctuation. Often, in this type of price movement, it is easier to trade.
However, as you can see, the downtrend on the right has fluctuated significantly and the price movement is not clear. As a result, trading in such a trend can be much more difficult.
Therefore, if you can evaluate the direction of short-term and long-term trends in the same direction, you will get better results in trading.
Moving average period
Many traders are confused about setting the right period for the moving average they use and are constantly using moving averages with different periods. This ultimately leads to good and bad results in trading and makes traders tired and frustrated.
Rolf Schlatmann uses 50-day moving averages and believes that the 50-period moving average is a good medium-term moving average overall and has a variety of uses.
The most important principle in using moving averages is that after selecting and setting a certain moving average, do not change it during the next 100 to 200 trades.
Again, do not insist on winning all your trades. Just let the profitable trades continue and stop the loss by setting the appropriate loss limit.
Changing long-term trends
The image below also includes the long-term moving average of 50 cycles per day (blue line) and the moving average of 50 one-hour cycles (green line).
Whenever the price breaks and crosses both moving averages, it changes direction for the short-term and long-term trends. The beginning of a trend change can provide good opportunities with a high profit-loss ratio.
Summary of key points
- Choose one or two moving averages and use only them.
- Do not change moving average settings during the next 100 to 200 trades.
- Start with a moving average of 50 cycles and do not change it.
- Instead of worrying about the right time to enter a trade, adjust your strategy so that profitable trades continue and losses are prevented.