In this guide we will discover how to use the moving average in Forex Trading, for a successful strategy.
Also known as Moving Average (MA) , it is one of the most used indicators also due to its ease of use. It only takes a few steps to establish an effective moving average and in Investments24 we will illustrate how to set it up in practice.
|🥇 Indicator||Moving average|
|🎯 Types||Simple – Weighted – Exponential|
|📈 Suitable platform||MT4 – WebTrader|
Particularly suitable for short-term focused trading strategies such as scalping, the moving average (MM) is also valid for intraday trading and is available on all the best trading platforms (indicators section).
Where to study the basic concepts of this indicator? Moving averages are explained clearly and punctually, with many practical examples, in the LiquidityX Ebook, a perfect guide available in PDF to know all the secrets of the indicator:
What is the moving average?
We can define a moving average as a mathematical algorithm that offers a synthetic indicator of the prices under consideration, filtering their volatility and therefore reducing the random peaks.
Through a mathematical formula, time intervals are taken into account, defined as periods, which are then mathematically calculated to provide an average of their values.
There are two variables to define an MA:
- Periods under consideration
- Time horizon
The periods in question are fixed values, configured with a parameter. The time horizon will inevitably vary according to the time that progresses. However, the moving average is calculated only over the periods taken into consideration. Obviously, the oldest data is replaced by the newer period, in line with the passage of time.
Here is a practical example: Suppose we consider the closing price of each session, with an MA set at 50 periods. As the days progress, the most remote period is replaced by the most recent, so the last 50 periods are always calculated.
How does a moving average work?
The practical application of a Moving Average in Forex Trading is very clear, since it is necessary to configure the indicator based on 2 aspects:
- Reference point
- Time frame used
In the first case, we will choose the parameter of our interest, or if we want to calculate the MA on the closing, opening prices or even on the maximum and minimum values reached in a session.
The second parameter that must be set is the Timeframe . When selecting a daily horizon, the values will be calculated taking into account the chosen time interval. We can also insert faster Timeframes (for example, 30 minutes) or longer (such as the weekly Candlestick).
How is a moving average calculated? The general mathematical formula includes the following factors:
- T: time horizon
- N: periods taken into account
- M: number of subsequent periods
- 0: the weight to attribute to each period
Therefore, the specific equation depends on the type of MA chosen, since there are 3 types.
Types of moving average
What are the most commonly used types of moving averages? These are the 3 most used in Trading:
Let’s find out the characteristics of each of them.
Simple moving average
Also known as the Simple Moving Average (SMA) , the Simple Moving Average is the easiest to use, especially for beginners.
The calculation method is very simple: the values taken into consideration, such as closing prices, are added together and then divided by the number of periods taken into consideration.
A Scalper trader will use periods between 10 and 20, an intraday trader between 20 and 50 and a position trader will also be able to set the simple MA at 100 or 200 periods.
If the main advantage of the SMA is the ease of use , the disadvantage lies in the poorly filtered data since each period will have the same weight. In other words, the most remote period will have the specific weight of the most recent, with the consequence of offering inaccurate market entry indications.
Weighted moving average
With the English term Weighted Moving Average (WMA) , the weighted moving average aims to overcome the problem of specific weight for each period by “weighting” selected time intervals in different ways.
Basically, more weight is assigned to the more recent periods and less weight to the more remote periods. In this way, market fluctuations are better filtered on the basis of up-to-date data.
How is the weighted moving average calculated? Here is your formula:
WMA = (C_1 * 1 + C_2 * 2 + C_3 * 3 +… + C_n * n) / (1 + 2 + 3 +… + n)
Each period is multiplied by N to give more value to recent periods. Obviously, the WMA offers a practical and more accurate solution than the SMA, however, it does not offer an instant view of what is happening in the market.
Exponential moving average
The exponential moving average (EMA) is the most used type in Forex Trading.
Its mathematical formula is particularly complex, since the periods taken into account for the calculation are many with respect to the SMA. This makes it necessary to calculate the EMA through a computer or simply by using the indicator present in our trading platform.
The calculation method is similar to that used for weighted, since more weight is given to more recent periods . However, even the most remote values remain included in the equation, albeit with infinitesimal values in the long run.
Therefore, it is a complex but extremely accurate and effective algorithm for our Forex Trading strategies .
How to trade with the moving average
Beyond the type of Moving Average chosen, the operation with this indicator is very similar and the Forex market is perfect to test this strategy.
How to trade with the moving average? The most common strategy is to select two:
- Quick, 10 periods
- Slow, 50 periods
When the fast moving average crosses the slow one, it will offer a market entry signal: BUY if it crosses up, SELL if it crosses down.
Below is a graphical example:
Every time the purple line (fast MM) crosses the orange line (slow MM), buy or sell signals are generated to be captured, defined with the term Crossover .
The simplicity of this trading strategy makes moving averages widely used in Forex, both by beginners and experienced investors.
Where to find moving averages? Simply click on the “indicators” section present on each professional trading platform and then set the reference periods.
What are the most used parameters? Generally, the fast moving average is established with 50 periods, while the slow one with 200. When there is a clear upward crossover, the famous “Golden Cross” will occur; on the contrary, a downward crossover with these values will give rise to the “Death Cross”.
Here is a summary of the pros and cons of this indicator:
Easy to use
You need other indicators for confirmation.
Rumors don’t always leak
Available on all platforms
Good operational effectiveness
Pros and cons of moving average
Excel Moving Average
How to calculate moving average in Excel? There are several solutions to follow, although the most practical is to use the analysis tool already present in Excel.
Many investors find it convenient to have a spreadsheet to manage and optimize moving averages for trading in financial markets. To manage this opportunity, you need to follow a few steps:
- Open Excel
- Click on «options»
- Select “extensions”
- Now click on «analysis tools»
- Identify “moving average”
- Synchronize the data
Now returning to our chart, simply choose the range of values to consider to have a useful moving average to optimize our operations in Forex or in the financial markets in general.
Tips for Moving Average Trading
Although it is a very reliable indicator, generally the moving average is associated with other indicators for greater precision.
The most widely used is undoubtedly the RSI oscillator . For example, if an overbought level signaled by the RSI does not correspond to a bullish crossover, then it will be possible to enter with a BUY with excellent chances of profit.
Even the MACD is commonly used in conjunction with the MA. Also in this case it is observed to avoid entering the market in phases of excessively bullish or bearish volumes.
The experts analysis technicians use mobile media along with waves Elliott , to have a well-defined range within which enter the market.
More tips for effective moving average trading? Make use of a Trading Signals service that will warn us whenever there is a Golden crossover of a particularly interesting crossover.
The best service in the field of signals is the one offered by LiquidityX , an excellent Forex broker that offers the exclusive free service to its clients. Simply sign up for free and request the signals provided by Trading Central, great for Forex!
In addition, LiquidityX offers a Metatrader platform , perfect for this style of trading, and for practice it provides a free demo account. It is traded with virtual money and there are no restrictions.
In short: signal service to be used in Metatrader and verifiable in the demo account . Undoubtedly the best solution to better test our trading strategy based on Moving Average.
This is where to request the services:
From Inversiones24 we have offered a complete description of the moving average and its practical uses in trading.
It is a very popular indicator for its good effectiveness and ease of use , perfect when used in conjunction with other instruments. Above all, trading signals are very effective in spotting particularly interesting crossovers.