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If you are a newbie trader, this article is for you. Trading can be extremely difficult and scary, but at the same time it can improve your knowledge and experience. Analyzing the markets and understanding how it all works can be an interesting endeavor. While there are many methods you can try, starting with a solid, popular indicator is a good idea.
One indicator that traders of all categories generally use is the moving average. The moving average is one of the easiest indicators to use because it only has one line. However, this line can provide you with a lot of valuable information if used correctly. Also remember that there is no 100% error-free guarantee.
What is the moving average?
It is a trend indicator which consists of a line placed on the chart, above or below the candlesticks. The main idea of the indicator is to smooth out price noise – price movements that don't matter – and to mirror price movement ignoring unimportant changes. This way the trader can make a prediction about future price changes. There are 4 types of moving average, which we will briefly review.
1. MMS – a simple moving average that shows the average price over a period of time.
2. The EMA is the exponential moving average. It prioritizes more recent prices over older price changes, which is why this type of moving average works well for short-term trading strategies.
3. The MMP – the weighted moving average – is quite similar to the EMA, as it also gives more weight to recent price changes, the only difference being in the calculation of the indicator. The MMP can alert the trader of a price change a little faster than the MME.
4. The MMSL is the smoothed simple moving average. It takes into account a large number of candlesticks and is much smoother than all the other types. It is rarely used in trading because it is the least sensitive to price changes.
How to set up this indicator?
To set up a moving average, simply choose it from the indicators menu. Each indicator has settings that the trader can leave by default or change the indicator's period (amount of candles taken for the calculation), color or type.
The parameters of the moving average indicator on the IQ Option platform
Traders can choose any type of moving average, but the most used are MMS and EMA.
Method of trading with the moving average
In order to use the moving average in a trading strategy, it is first necessary to understand what this indicator can show. The moving average reflects the direction of the trend by following the candlestick chart and smoothing out price movements for a more accurate prediction.
Using the MM indicator, traders can determine the direction of the trend and possible entry points for a trade.
In order to determine the direction of the trend, a trader can, for example, do the following:
1. Apply a moving average to the chart. Traders can use any variation of the indicator. For this example, a simple moving average (MMS) is used.
2. Watch the position of the indicator against the candlestick chart. When the trend is up, the moving average is found below the candlestick chart. When the trend is down, the indicator line is located above the chart. The steeper the slope, the stronger the trend.
An MMS applied to the chart moves above and below the candlesticks
How to use this information to open a position? What a trader should look for is the crossover, which is where the indicator meets the chart. Why? Because when the chart crosses the indicator up or down, there is a high probability of a trend reversal.
Consider the example below. An MME indicator with standard parameters is used. It is applied on the EUR / USD chart with a short candle period – 10 minutes.
Crossovers on the EUR / USD chart
In order to find potential entry points for transactions, the trader can, for example, do the following:
1. Apply an MM indicator to the chart and monitor the crosses between the indicator and the chart
2. When the indicator crosses the chart from bottom to top, it is considered to be issuing a buy signal. In this case, the trader may consider opening a "long" position, for example, hoping that the price will continue to rise.
3. In case the indicator crosses the chart from top to bottom, it may be a sell signal. In this case, the trader can consider a "short" position.
How to improve the method?
There are ways to tailor this indicator to your specific needs. For example, short-term traders can use an MMS with period 8 (higher speed MMS) and combine it with a period 5 EMA. An upward crossover of the MMS with the EMA would suggest a buy signal. , while a bearish cross would give a sell signal.
The EMA (5, in blue) crosses the MMS (8, in red) upward at two points, indicating an upward movement
The moving average is a great indicator because it is simple to use and it can be combined with many other indicators for better performance. As it is a trend indicator, it tends to be a bit behind the trend. Therefore, in order to increase accuracy, traders can use oscillators, such as the stochastic oscillator or CCI.
Combining multiple indicators is always a best practice, as it can confirm the signals received from each indicator and base the decision on more data. However, it should always be kept in mind that indicators can also give false signals and that there is no guarantee of 100% accuracy of the information.
Source: IQOption blog (blog.iqoption.com) 2020-10-20 18:34:31
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