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|Simple Moving Average|
Why do we use the moving average?|
We use it just because it smoothes out the price fluctuation. It means it eliminates the noises and makes the chart clearer for trading. Let see some examples and then I will explain the different kinds of moving averages and the way you can use them in your trades.
In the below chart, the thick line is a moving average which is set to 20 (20MA) and the thin line is the price. As you see the moving average has eliminated a lot of noise and has smoothed the price fluctuation. You can set your moving average in the way that it becomes plotted with different colors when it goes up or down.
Let’s try the 40 moving average and see the difference:
Different Kinds of Moving Averages
3- Weighted: It is another kind of exponential moving average but this one also has more weight on the recent prices to make the moving average faster. It has more noise than the simple and exponential moving averages:
4- Wilder’s Smoothing: It has less noise than all other kinds of the above moving averages
There are some other kinds of moving averages like triangular, end
point and time series but I don’t talk about them because they have a lot
of noise and have no application in the forex trading. Remember that
eliminating the noise was the most important purpose of using the moving
averages. So why should we use a moving average that has even more noise?!
Using several moving averages on the same chart is a good idea to know if the market is ranging or not. Maybe those who created the Alligator indicator had the same thought. Alligator consists of three different moving averages.
Look at the below chart carefully. There are three Wilder’s Smoothing Moving Averages in it:
1- The dark green moving average is set to 9 (Slow)
Also please note that these moving averages are applied to (H+L)/2 and not the close price only. This helps to have a better and smoother moving averages.
These three moving averages make an indicator with each other. This indicator is known as Alligator. It is a good indicator to find the trends and avoid the ranging market.
When the market is Bullish (the price is going up) the red moving average (the faster one) stays above the other two; the light green moving average stays at the middle and the dark green moving average (the slowest one) stays under the other two:
So when the red MA goes above the others it is time to take a long
position and when the dark green MA goes above the others and the red MA
goes under, it is time to close the long position or take a short
position. As you can see in the above image, there are two “Warning”
signals that the red MA tried to cross the other two MAs and it succeeded
to cross the light green but failed to cross the dark green. Any of these
two “Warning” signals could cause some of the traders to close their long
position but those who are more patient and also are familiar with the
Elliot Waves, kept their long position and maximized their profits.
If you have problem in distinguishing the flat/ranging market, adding a
Heikin-Ashi chart can be a big help. I suggest you to read my Heikin-Ashi
article here. The good thing about Heikin-Ashi is that when the market is
Bullish or Bearish and we have good trends, the Heikin-Ashi candles have
the same color and shapes. When the market is Bullish, all the Heikin-Ashi
candles are green and have no lower shadow and when the market is Bearish,
the Heikin-Ashi candles are red and have no upper shadow.
So is it good to trade using moving averages or not?
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