Which periods of ema are fast and slow. Forex Indicators: Moving Averages
In order to calculate the arithmetic mean of any numerical sequence, various formulas are used. The overwhelming majority of them are special cases of the general formula, which is the sum of the products of all numbers and their corresponding coefficients, divided by a numerical value. Usually, a certain relationship is established between the coefficients of adjacent numbers in a sequence, for example, in EMA indicator they differ by about 2.7 times.
This dependence is called exponential, since 2.7 is the Euler number (denoted by the letter e), which is the base of the exponent (this is an exponential function, the derivative of which is equal to itself). Therefore, the indicator we are considering is called the exponential moving average - EMA (from Exponential Moving Average).
It is a special case of the method of analysis called averaging and is implemented by the Moving Average indicator, which by default is an analytical component of any MT trading platform. Therefore, you do not need to download the Exponential Moving Average indicator. It is located in the “Trending” category (highlighted with a brown outline in Fig. 1) and a double click on its name leads to the appearance of a setting panel - in it the “MethodMA” variable must be assigned the Exponential value.
In this case, the algorithm for calculating the EMA indicator is switched according to the formula shown in Fig. 2. Its peculiarity lies in the use of its previous value for calculating the current moving value. Parameter P is by default equal to twice the reciprocal of the period increased by 1.
In some cases, it is necessary to calculate the exponential average with a different value of P. Then it is possible, the setting allows you to set the variable Coef to any numerical value (Fig. 3). It is she who is the equivalent of the parameter P from the formula.
This functionality allows you to more accurately adjust the EMA moving average indicator curve to the Forex chart, which allows you to get more reliable analysis results, and, therefore, conduct more profitable trading.
Non-standard EMA indicators in forex - what is it
They differ not only in the flexibility of the settings for calculating the formula of the EMA indicator in MetaTrader, as in the modification described above, but also in the visualization of results that is more convenient for some applications. Let's look at a few examples.
Indicator Description
It calculates two exponential moving averages with different periods. Then the algorithm determines on which candles the intersection of the calculated movings curves occurred and these candles are marked with arrow signals (Fig. 4):
- green - fast EMA Forex has become higher than slow;
- red - the slow EMA Forex has become higher than the fast one.
The EMA strategy implemented on this indicator assumes buying along the green arrow and selling along the red arrow. In this case, it is necessary to use some additional filter of false signals (for example, an oscillator or support / resistance levels).
In it, several exponential smoothings are performed sequentially over the quote. Thus, a decrease in the lag is provided, which is simply necessary when the distance between adjacent quote extremes is no more than two dozen candles. In this case, the trader has an opportunity to enter and exit the market more profitably.
Indicator
Its line is drawn in two colors (Fig. 6):
- red - if its successive values decrease;
- green - if its successive values increase.
In this case, it is convenient to use Color EMA as a filter in forex strategies:
- if the line is red, then it is advisable to consider sales;
- if the line is green, then it is advisable to consider purchases.
And line color changes can be independent trading signals (but you need to filter out false ones from them):
- from green to red - sale;
- from red to green - buy.
Indicator
It takes into account trading volumes, which are calculated approximately by summing several distances between candlestick prices. After that, a number of arithmetic operations are performed on the results obtained, as a result of which 3 numerical sequences are formed, displayed as curves in the basement window (Fig. 7):
- red shows the volume of purchases;
- blue shows sales;
- green is their average.
You can use the EMA AZZX Volume indicator like this:
- if the blue line becomes higher than the red one, then a short position is opened and a long position is closed;
- if the red line becomes higher than the blue one, then a long position is opened and a short position is closed.
It is determined by adding a certain fraction of the current closing price to the previous value of the moving average. When using exponential moving averages, the most recent closing prices are given more weight.
It is used to track the market, on the basis of which it is possible to make decisions regarding currency transactions, having a more realistic picture of prices, which gives more guarantees for profit from transactions.
When using EMA, it is important to choose the right period for its averaging. The shorter the EMA is, the more often its direction will change and the more sensitive it is to price changes. Those EMAs that are longer, are characterized by fewer turns, and are also more effective in showing long trends.
The longer the player's trend is, the longer the averaging period. In this case, the period of averaging over the duration should be half the length of the dominant trend. For example, with a 20-day trend, the averaging period will be 10.
The indicator is a trend indicator, that is, it works only when the direction of the exchange rate changes and then with a delay. In a flat or sideways movement of the rate, it is useless or you need to set a smaller number of periods.
EMA indicator signals - depending on the direction of the indicator line - up or down, you need to buy or sell. Also, if the price crossed the indicator chart, then this is regarded as a change in the direction of the trend, and accordingly, you need to enter the market in the direction of the price movement.
Since the indicator used is a trend indicator, the main outgoing signal from it will be the direction of its own movement.
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With its help, you can easily determine:
Trend.
Support and resistance levels.
It is also well suited for identification and measurement:
Breakout price.
Price impulse.
Also, the tool can easily identify, for example, an uptrend when:
The indicator is growing.
The price is above the line
The line with a shorter period is above the line with a longer period.
1.2. Calculation formula. Downloading EMA indicators
EMA = (CLOSE (i) * P) + (EMA (i - 1) * (100 - P))
where:
CLOSE (i)- the closing price of the current period;
EMA (i - 1)- the value of the moving average of the previous period;
P- the share of using the price value.
That is, exponential processes today's price, which is multiplied by a certain percentage. This percentage is a weighted factor, multiplied by the rule, becomes the sum with the previous moving value, which is multiplied by one minus the multiplication factor before summing. The weighted percentage is found as follows:
% (5 days) = 2 / (5 + 1) = 33.3%
It is most likely that you will not be able to download the EMA indicator in the standard version, since this indicator is a standard trend indicator MA (Moving Average), only the method is exponential:
1.3. How EMA indicators work
This indicator is required if you need to adapt the EMA for any external parameter (volatility, volume, speed, etc.).
You can use a fractional period in your calculations (for example, 21.5), and also use a coefficient instead of a period. For example, Wilder uses EMA with a factor of 0.07143 (1/14) in his ADX indicator.
Also, the indicator has added two price options for calculation, these are the arithmetic mean (O + H + L + C) / 4 and the median option calculated as (O + C) / 2.
By definition, the median must meet the condition that 50% of the sample prices are above it, 50% below it. And since we are dealing with a sample of 4 points (Open, High, Low, Close), the median (H + L) / 2 hammered into MT does not always correspond to the 50/50 condition.
Indicator parameter for selecting the SetPrice price type:
0: Close;
1: Open;
2: High;
3: Low;
4: (High + Low) / 2
5: (High + Low + Close) / 3;
6: (High + Low + 2 * Close) / 4;
7: (Open + High + Low + Close) / 4;
8: (Open + Close) / 2;
If the EMA grows, this is a signal to open a buy position. When the price approaches the line of the EMA indicator or just below it, you need to enter the game. At the same time, we place the stop loss below the previous minimum, pulling it up as the price rises.
When the EMA falls, you should play a decline. We open a sell position when the price is placed near the EMA line. At the same time, stop-loss is placed above the previous maximum, lowering it with a decrease in the price. If the EMA has a horizontal trend of movement with small fluctuations, then this indicates the presence of a flat. In this case, you cannot play using EMA.
The EMA indicator works without delays, so be careful, as you can accidentally react to the wrong signal, which will lead to erroneous actions.
The main signal emitted by the indicator depends on the direction of the sides of the movement of the foreign exchange market. As soon as the indicator goes up, the trader, in turn, needs to immediately start trading up. If he started to go down, then, accordingly, you need to play a fall.
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1.4. How to use the EMA indicator
As mentioned earlier, EMA is a standard MA (Moving Average) trend indicator.
To open it:
- We go to Insert
- Choosing Indicators
— Trend
— Moving Average
- In the parameters tab, select Exponential
- Press OK
1.5. Outcomes
The EMA is used to track the market, on the basis of which it is possible to make decisions regarding currency transactions, having a more realistic picture of prices, which gives more guarantees for profit from transactions.
When we open sell trades, the price falls to the middle point in the movement of the rate, or there are times when the price falls below. In this case, it is advisable to set stop losses several times less than our last local peak on the chart.
In the case of a sell, its conditions are reversed: if the price has risen to the level of the EMA indicator or continues to move up, here the stop-loss should be set slightly higher than the final local maximum.
If the movement is going straight, as usual, then absolutely no action should be taken!
The disadvantages of this indicator include the fact that when the old value is changed, it is not displayed on the indicator.
Also read about.
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OSMA indicator
2.1. Description of the OSMA indicator
The name of this indicator is translated as “Moving Average of the Oscillator”. And this perfectly captures the essence of this analytical tool.
Its main purpose is to identify bearish and bullish divergences (inconsistencies between the direction of movement of the oscillator and the price).
The indicator is calculated as the difference between the values of the MACD oscillator and its signal line, which is the moving average. The results obtained are displayed on the graph in the form of bars that rise or fall relative to the zero line.
It turns out that when MACD is above the SIGNAL line, the OsMA histogram will be above the zero level. Conversely, when MACD is below the SIGNAL line, OsMA bars will be placed below the zero line.
Also, the greater the distance between MACD and SIGNAL, the longer the bars of the histogram of the "OsMA" indicator. The opposite is also true - the closer MACD and SIGNAL are, the shorter the histogram of the oscillator.
If MACD and SIGNAL coincide, the "OsMA" value will be zero, and the corresponding oscillator bar will simply not be drawn (usually this can be observed at the moment of the histogram transition from the negative area to the positive area and back)
2.2. How to use the OSMA indicator
The OsMA indicator is included in many popular trading platforms including MT4 and is in the oscillator group.
When setting the Moving Average of Oscillator, four main parameters are used.
Let's consider them in more detail.
1. Slow EMA - exponential moving average of prices with a relatively long period. The default is 26.
2. Fast EMA - the same moving one, but with a short period (12).
3. The MACD indicator is calculated by subtracting the fast EMA from the slow one. MACD SMA is a simple moving average of MACD values (signal line), the task of which is to smooth the histogram. Its period is usually short, in our particular case it is 9.
4. For the price type parameter, you can use any source data. Traditionally, this is the closing price of bars (Close). But you can use other initial data: price minimum (Low) or maximum (High), open price (Open), as well as various average prices (Typical Price, Median Price, etc.).
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2.3. How OSMA indicators work
Since the OsMA oscillator is very closely related to the MACD indicator, it is not possible to talk about its trading signals in isolation from the MACD itself. Therefore, the behavior of both "OsMA" and MACD, in different market situations, will be analyzed by us simultaneously.
First, let's look at the simplest trading signals:
1. Buy signal (long position)- it appears when the OsMA histogram crosses the zero level in the upward direction. Further growth of the oscillator bars tells us about the strengthening of the bullish trend.
If at this moment we look at the MACD, the parameters of which have been adjusted in the same way as the “OsMA” parameters, then we will see that the MACD histogram crosses its signal line (SIGNAL) also in the upward direction.
Further, as the distance between MACD and SIGNAL decreases, the growth of the OsMA indicator bars will also slow down and begin to decrease. The very fact of such a fall means a weakening of the trend and encourages thinking about closing the deal.
2. Sell signal (short trade)- it will be the opposite situation, namely the crossing of the zero line by the OsMA histogram from top to bottom. If then the "OsMA" bars continue to rise downward, it will confirm the emerging bearish trend.
Look at the MACD at this moment, and you will see that its own histogram also crosses the SIGNAL line from top to bottom. At first, the distance between MACD and SIGNAL will grow, causing the OsMA bars to grow, but then, as this distance decreases, the Moving Average of Oscillator bars will decrease in direct proportion. The downward trend is weakening! It's time to think about closing a sell position.
It is also worth noting the possibility of false signals. Therefore, for reliability, it is recommended to additionally apply some other technical indicators that will strengthen the protection against trading against the trend and help to determine the most profitable entry points.
2.4. Moving averages strategy
Moving averages strategy
Is a trading tactic based on the most popular trend technical indicator Moving
Average. It is the moving averages that can clearly display the current trend in the market, show the points of entry into the market in a timely manner, and also state the intended market reversal.
The strategy uses three moving averages that show the point of entry into the market, cut off false signals, and allow you to determine the global trend.
Since the strategy is based on a moving average, which is essentially a trend indicator, the strategy must be applied on hourly and four-hour charts. The choice of a currency pair depends solely on the preferences of the trader.
To find the required folder, you need to launch the trading platform and open the root directory in the file menu. After you drop the template, close the root directory and update the installed component in the "Navigator" panel. After the update, the file should appear in the list of templates.
To launch it, call the additional menu on the chart and select “Moving averages strategy” in the list of templates.
There are two types of signals in the strategy - the main strong one and the additional weak one.
Basic buy signal:
1) The price is strictly above 120 in front of one moving average.
2) The MA with a period of 7 (blue) crossed the MA with a period of 14 (yellow) from the bottom up.
3) OsMa histogram above the zero level.
It is very important to enter strictly by a closed candle, since the crossovers of the moving average can change in the event of a sharp price change. A stop order must be placed along the downward arrow of the fractal.
The strategy is based on three indicators, and only two of them really influence the making of trading decisions. So the strategy uses three moving averages with periods of 120, 7, 14.
A sliding one with a period of 120 is necessary to determine the main global trend, namely, if the price is above the red line, then there is an upward global trend in the market, and if the price is below it, there is a downtrend in the market.
In the strategy, placing the price relative to the moving one with a period of 120 is a reference point for making deals.
Moving averages with periods of 7 and 14, and on the screen you can see them in yellow and blue, are responsible for the entry point. So, when crossing the fast moving slow one, we get a signal according to our strategy.
It is very important to understand that signals will only be taken into account in the direction of price placement relative to the moving average with a period of 120.
The underlying basis for an additional buy signal is that the 120 period moving average acts as support.
So, an additional buy signal:
1) The price moved downwards and touched the moving average with a period of 120.
2) We are waiting for the decrease in the OsMa histogram bar below the signal line.
Basic sell signal:
1) The price is strictly under the 120 period.
2) The moving average of 7 (blue) crossed the moving average of 14 (yellow) from top to bottom.
3) OsMa histogram below zero level.
It is very important to enter strictly by a closed candle, since the crossovers of the moving average can change in the event of a sharp price change. A stop order must be placed along the fractal arrow pointing up.
The basic basis for an additional sell signal is that the 120 period moving average acts as resistance.
So, an additional sell signal:
1) The price moved upwards and touched the moving average with a period of 120.
2) We are waiting for the decrease in the OsMa histogram column above the signal line.
We enter only by a closed candle, and place a stop order 5-10 points behind the moving average with a period of 120.
The moving average strategy is really a working tool for catching profits in trending markets. The disadvantage of the strategy is the weak lag of signals, but this is nothing more than a technical feature of signal indicators, rather than a disadvantage.
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2.5. Conclusion
The "OsMA" (Moving Average of Oscillator) indicator is not an ordinary oscillator, it perfectly shows bullish and bearish divergence. Unfortunately, some traders grossly underestimate the value of the OSMA indicator, preferring the MACD indicator.
But it is important to understand that "OSMA" reflects the "mood" of the MACD and can accurately predict further movement of the indicator, and accordingly the dynamics of the price chart. In the case when "MACD" is above the signal line, then "OSMA" is positive, if lower, then negative. And since these indicators are "helpers" for each other, you will achieve more accurate results by simultaneously applying these indicators in trading on the foreign exchange market.
Conclusion about EMA and OSMA indicators
In today's article, we examined the work of two indicators. EMA and OSMA.
EMA is usually used to track the position of the market and, based on the results obtained, decide which transactions to carry out with the currency. This indicator helps to see the real picture with prices, which in turn gives guarantees of making a profit from the operations performed.
The OSMA indicator shows bearish and bullish divergence. In order to achieve more accurate results, it is better to use it in conjunction with the MACD.
One of the most common indicators that takes place in the application of technical analysis is the ema indicator. Despite the fact that it is a lagging indicator, its application works in trending directions very well.
So, let's take a closer look at this indicator. In fact, this is the simplest moving average. That is, the sum of the period values divided by the quantity. But since this is exactly the EMA, it means that the average is exponential. And this, in turn, means that the exponential moving average takes into account not only new values but also those that have already passed, thus reflecting the price movement more efficiently.
How to apply the ema indicator in practice? First of all, it is necessary to take into account the indicator's ability to reflect the behavior of price dynamics in the market. To do this, you need to set the required parameters. The first is the value by which the indicator will calculate, and the second is the shift of the line by a certain number of time periods. One of the good things about this analytical tool is that it is easy to adjust and analyze manually.
The simplest and most reliable signal of this indicator is when the price chart crosses the EMA line. If the price breaks the line from bottom to top, this is a buy signal; if it breaks from top to bottom, it is a sell signal. In the image above, such signals are shown with a green square.
Another purpose of the indicator is to determine support and resistance levels. It should be borne in mind that the higher the EMA value, the more serious and accurate the levels. Shown in the image with a blue square. However, the simplicity and reliability of this analytical tool does not end there. Let's just take and add another EMA, but more sensitive, that is, with a smaller parameter.
So. As shown in the image, applying two EMA lines gives an even more complete picture of the situation. If we look in more detail, we find two additional signals. The first is when the more sensitive EMA (blue) crosses the average with a lower parameter, that is, a smoother one. This generates a signal - if from the bottom up to buy. If from top to bottom - for sale. Marked with a green square in the image.
And the second - when, at a certain movement, the price breaks out the fast EMA in the direction of the slow EMA. From top to bottom - for sale. Bottom up to buy. Shown in the image as a blue square.
Thus, the ema indicator is able to provide a whole range of signals and levels that must be analyzed and used in the trading process. Moreover, the diversity of this simple tool allows for huge amounts of improvisation, which can make it possible to create entire trading systems.
An illustrative example of how the ema indicator can be used in three versions at once. This is a trading system based on three EMAs. Their parameters are as follows: EMA-360, EMA-89, EMA-21. The longest-term average line gives us the opportunity to identify the main long-term movement, which can last up to a year or more, clearly signaling us about levels and trend changes. It also allows you to determine the "bottom" of the price movement, which is a sin not to use. Medium and short-term EMA allows you to analyze in a shorter time frame and determine the time of an open order. Thus, the ema indicator of three lines makes it possible to see the most important factors of price movement. This is a long-term trend, these are signals to open and close orders, these are levels that determine the likelihood of further movement.
In a word, such an indicator, which has a very simple principle, with skillful use, can become a very powerful tool for Internet trading.
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Once we have already dwelled on the topic of plotting the Simple Moving Average. Here we will talk in more detail about the theory associated with the EMA indicator for MT4.
In particular, we will consider:
- how moving averages differ from exponential averages;
- how to build an EMA correctly;
- how to apply the EMA indicator;
- how the EMA can be used in conjunction with other Forex indicators;
- what trading strategies exist with the use of EMA.
As a reference, we recall what there are moving averages:
- Exponential Moving Average
- Simple Moving Average
- Linear Weighted Moving Average
- Smoothed Moving Average
Building an EMA
Thus, the inflicted movings in relation to the current price will move closer and further.
Figure 1. Currency pair - EUR / USD, indicators - SMA10, WMA10, EMA10.
Using an exponential moving average in trading
The EMA indicator is used in trading for the following purposes:
- Stop-Loss settings.
- Determine the direction of the trend.
- The trading signal is after the crossing of the moving averages.
- Acts as resistance / support zones.
- It can be used with a number of other indicators.
Note that Еxponential Moving Average perfectly determines the current market trend. For a bullish trend, Forex must the following conditions are met:
- the EMA indicator should look up;
- the current price is above the EMA;
- the exponential average with a shorter period must be above the EMA with a longer period.
Note that a correctly selected period of the exponential middle line for a particular timeframe under consideration will qualitatively indicate support and resistance levels. To limit losses through Stop Loss, this stop order should be moved far beyond the EMA indicator for MT4, and not forgotten beyond local extremes.
Many traders continue to consider the moment of crossing the EMA at various time frames as a strong signal to enter the market. But this approach to market trading no longer works, as the EMA lags behind the market movement, especially when it is in a sideways movement.
This is how the EMA indicator with a period of 50 looks on the chart of the EUR / USD currency pair, the H4 timeframe:
Figure 2. EUR / USD, H4, ЕМА50.
About false breakouts of EMA
Like any indicator in the Forex market cannot be called an ideal tool for making money... The EMA indicator also shows false entries, which are not always determined by market participants as part of the breakouts of the moving averages. False breakouts are often observed on sideways market movements. Indeed, in it, the EMA periodically breaks through the price from top to bottom, then from bottom to top.
Naturally, in such cases, the Stop Loss will need to be moved far beyond the opposite polarity of the exponential moving average. You need to focus on nearby local extrema.
Figure 3. Examples of false breakouts.
The main disadvantages of working with the EMA indicator
To better understand what the Forex EMA indicator is, let's talk about its cons:
- All moving averages follow the price, and therefore they are late with the definition of a new trend. They become effective only on pronounced price movements.
- A couple can move long enough until the EMA indicator shows a signal to enter the market.
- Many false signals within the "side".
- Due to the fact that the indicator does not keep up with the price, its signals will be lagging, in connection with which the risks of making a profit on the transaction increase.
Alligator trading system
For the work to be considered completed, we need to install 3 EMA indicators, which will have different parameters and shifts in time intervals. In addition to them, you need to install the Fractal indicator.
For a deeper trading efficiency, it is best to pay attention to the following parameters:
- EMA 9(shift 3);
- EMA 15(shift 5);
- EMA 25(shift 8).
All exponential averages are plotted at half the sum of each closed candle.
Pay attention to location of the current price... If it is above its value, then only purchases are considered. If it stays below the moving average, then sells. Profit should be taken when the movement slows down.
Using the example below, we have shown examples of working with the Alligator strategy. Price breaks out of all exponential moving averages when a bullish trend occurs.
Formed 1st local maximum(it is marked with the fractal indicator). Our EMA 9 indicator breaks two slow moving averages from bottom to top. So, we can observe how 2 signals are simultaneously formed at once:
- EMA lines are crossed.
- Fractal appears.
Figure 4. Trading with the Alligator.
More cautious traders who have read the description of the EMA indicator prefer to wait price rollback to the lips of "Alligator" and only after that they enter the market. However, in this case, it was possible to open a sell deal.
Conservative traders can wait for the price to retrace to the alligator's lip line and then enter trades. From our point of view, this approach is the most correct.
EMA application with other indicators
As we wrote above, exponential average lines can be used in conjunction with the Stochastic indicator.
To do this, you need to plot the following indicators:
- EMA50 (blue);
- EMA13 (red);
- EMA4 (green);
- Stochastic Oscillator with levels 60 and 40, as well as values of 12.9.5.
Consider an example of this strategy on a pair EUR / USD Н4.
If we look below, we can see that the lines of the Stochastic indicator are significantly ahead of the signals from the EMA.
So, let's figure it out when open a sell order:
- When the green moving average crosses the blue one from top to bottom.
- Stochastic will break through level 60 from top to bottom.
- The blue EMA will be crossed from above by the red moving average.
Figure 5. EMA + Stochastic.
Stop Loss is placed 50 points from the entry point. Profit taking occurs when the price breaks out of the blue moving average.
EMA + ADX + MACD strategy
To work on this vehicle, we can use absolutely any pair with H1 timeframe... But first, let's install the following indicators:
- EMA21;
- EMA7;
- MACD12.26.9;
- ADX14.
As an example, consider how we will enter the market on the EUR / USD pair, H1 timeframe. The entry rules are as follows:
- The faster EMA7 crosses the EMA21.
- ADX 14 indicator is directed upwards and is above level 25.
- MACD indicator crosses the zero line.
In the screenshot below, we have marked the entry points numbered 1,2,3. The entrance is made in accordance with all the rules. The trade must be closed as soon as the price crosses the EMA in the other direction.
Figure 6. EMA + ADX + MACD.
As a conclusion, we note that we talked about the exponential moving average, as well as how it can be applied with other indicators. Until now, do you think you need to download the EMA indicator or is it not worth your time? We hasten to assure you that it is definitely worth using in conjunction to filter profitable signals.
Free download of the EMA indicator
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The moving average is an important tool for assessing the trend.
We use Moving Average to smooth out variations in the data to better recognize the underlying trend. They do this by looking back at the recent number of data points and then calculating some form of average.
In this article, we will discuss how to use a simple moving average (SMA) as a guide for identifying, confirming, and tracking a market trend.
As a trend indicator, SMA is a good tool that every trader should be familiar with.
We will also discuss a specific type of moving average called the exponential moving average (EMA).
We will also look at an easy-to-use trading tool called the exponential moving average indicator. This method is used to assess the trend in the Forex market.
First of all, let's answer the question, what is simple moving average ?
Simple moving average - definition
A simple moving average is the simplest form of a moving average.
A moving average is an average calculated over a specified number of recent data points. This value is recalculated periodically, choosing the oldest value in favor of the most recent period.
Let's take a simple example to illustrate how to calculate the SMA.
Example: How to Calculate a Simple Moving Average
We calculate the value using the simple moving average formula:
SMA = (sum of price values for n periods) / n
Let's use price examples to show a simple moving average example. Suppose we want to calculate the 10-day SMA using daily closing prices, and suppose the closing prices for the last 10 days are shown in the following table:
Closing price example |
|
The simple moving average period, n, is 10 in our example. So we add up our 10 closing prices and divide by 10. Easy!
The sum of our values = 24 + 26 + 23 + 28 + 30 + 26 + 22 +19 +24 + 20 = 242
SMA = 242/10 = 24.2
The next day, we will discard our old Day 1 value and instead add the closing price of the newest day in our calculations, which will give us a new average. Therefore, the value of the average changes over time, which is why it is called a moving average.
Finding a simple moving average is not as easy as you can see. Indeed, long before computers were common trading tools, analysts would develop manual daily moving averages. If you are counting on a large number of periods, or if your periods are short time frames, the job can be very time consuming.
This is why we allow the processing power to cope with a simple moving average algorithm so that we can focus on the results of the computation rather than the computation itself.
Using the SMA MT4 indicator
The sma indicator how to use it in trading?
The moving average indicator comes bundled with as one of the main indicators, meaning you don't need to compile a separate simple MT4 moving average indicator.
You will find the Moving Average indicator in the trending folder in your MT4 navigator, as shown in the image below:
Source: MetaTrader 4 platform, March 2018
As you can see from the image, the moving average MT4 moving average indicator offers you several methods to choose from. Naturally, for SMA, you choose Simple as the method. The SMA parameters you need to accept are the values for Period, Offset, and Apply to.
The period is the same as N in our SMA formula. The larger the value for N, the smoother our moving average line will be, but the slower it will react to price changes. Smaller values for N will produce a faster SMA line. It will react more quickly to price changes, but will be less smooth.
You can compare a faster (i.e., shorter period) SMA with a slower (i.e. longer period), as we will see later in the strategy section of this article.
Offset is the least important of the SMA settings. The entered value shifts the SMA indicator in time along the time axis, a positive value shifts the SMA to the right and a negative value to the left.
A negative offset is only useful as a tool for finding historical data. If you are looking for the SMA for the current period with a negative shift, this is not possible - you will need a value for a period that has not yet occurred in order to complete the dataset. Using the default 0 is recommended as a good starting point.
The Apply To menu gives you seven options:
- closing;
- opening;
- maximum;
- minimum;
- average price, which is (high + close) / 2;
- typical price (high + low + close) / 3;
- weighted close, which is (high + low + close + close) / 4.
By default, the SMA indicator is used to close and, again, this is a good place to start. Empirically, you will be able to choose the best simple moving averages.
In the image below, you can see the 50-period SMA indicator for the GBP / USD hourly chart:
Source: MetaTrader 4 platform, prices from Admiral Markets, GBP / USD H1 chart, from November 14, 2017 to November 21, 2017
What does a simple moving average tell a Forex trader? Primarily, the SMA allows you to observe short-term price fluctuations and thus better perceive the underlying market trend. Notice how the Forex SMA indicator smooths out the market movement. An uptrend in the market, in this case, is more pronounced when reading a simple moving average, and not just in terms of price.
Determining the trend using moving averages:
Also notice how the price stays above the SMA line for the vast majority of the trend. Here we have a few key points for how to trade with the SMA indicator.
- First, we can use a price move above the moving average as an input to buy.
- Second, a price that remains above the moving average is a confirmation of an uptrend.
The converse is also true: we can use a price move below the SMA as a sell signal. The price remaining below the SMA is confirmation. So let's now talk a little about how to use these concepts in a simple moving average trading strategy.
Forex Moving Average Strategy - Based on Moving Average Crossovers in MT4
The Moving Average strategy - based on moving average crossovers - is pretty trend-following. In our image above, we saw a move above the 50-period moving average. Alternatively, we can use a different moving average instead of price.
The bottom line is that the direction of the signal is set by the direction of intersection of the fast-acting price series along the slower one. So, for example, you can use a 20-period moving average as a fast series and a 50-period moving average as a slower one.
If the 20-period MA crosses above the 50-period MA, it will be a buy signal. If the 20-period MA crosses below the slower MA, it will be a sell signal.
We use our moving average as a guide to the likely future of the market. Of course, such a simple moving average forecasting is based on a key assumption, namely that future data values will follow a trend.
As we all know, historical data cannot accurately predict future values and in fact there can be many trend changes. Thus, historical data is an imperfect guide for an unknown tomorrow, but remains one of the few guides available.
When analyzing historical data, the question arises as to how much historical data needs to be included. Are we considering all the previous data?
Or do we decide that only the most recent data has anything to do with what comes next? Moving averages try to provide a simple but effective rule of thumb for the problem, given the average over a given observation window.
We can come up with other trading strategies by combining different moving average indicators, including SMA MT4 with other trading instruments. One way to do this is to use the SMA as a trend filter and use a different indicator for trading signals. For example, you can use Keltner Channels for entry signals, buying when the price breaks above the Keltner channels or selling when it breaks below the channel.
The filter is triggered only by the following signals that are consistent with the direction of the larger trend. That is, we can only buy if the market price is above our SMA and only sell if the price is below our SMA.
Keltner Channels are just one of the many additional tools you get with. MT4SE is a customizable plugin for MetaTrader that greatly expands the platform's functionality - and is free to download.
Exponential moving average or simple moving average in trading
As you can see from the Type dropdown in MT4, there are several types of moving averages available. The two most common are Simple Moving Average and Exponential Moving Average (EMA).
As we have seen, the SMA is not weighted - all data points are treated the same when calculating the average. When using EMA, weighting is applied, with lower data values having more weight when calculating the average.
Changes in the moving average will occur after the market price has already started to move. This is why the main use of the moving average is as a trend confirmation tool.
Weighted averages try to soften the lag by focusing on the latest data points, suggesting that more recent data is more relevant to predicting what might happen next.
When comparing SMA to EMA, one of them is inherently no better or worse than the other; it is rather a matter of understanding the difference and using whichever best suits your requirements.
Probably the best way to figure out what works for you personally is to try. Using it will allow you to do this as many times as you need without risking money through trial and error.
So what is an exponential moving average?
As we said in the introduction, a moving average looks back at recent price values and calculates an average. There is more than one way to calculate the average, and there are several types of moving average.
The simplest method is the Simple Moving Average (SMA), which takes all price values equally and takes the average as the average.
It is quite difficult to name the definition of an exponential moving average without delving into the specifics of the corresponding calculations. Broad definition of EMA: a smoothing method obtained by adding a portion of the current price to a portion of the value of the previous moving average. To properly understand what is happening, you need to turn to mathematics. So let's get on with it.
How to calculate an exponential moving average
We calculate the EMA at time - t - using an exponential moving average formula as follows:
EMAt = α x current price + (1- α) x EMAt-1
Where α is a smoothing constant with a value between 0 and 1. EMA -1 is the EMA for the previous period. You can see from this that calculating the EMA for a given point in time requires us to do preliminary calculations to know the EMA for previous periods. For the daily EMA, we get the current value from the previous day's EMA, which in turn we get the day before, and so on.
In other words, there are still other steps. The first one is to get the initial EMA value for the first period in our window. We also need to define our smoothing constant. Probably the best way to illustrate the process of finding an exponential moving average is to look at a specific example.
Exponential Moving Average Example
To keep the example simple, I'm going to use just a few data values. Let's take a look at calculating the 8-day EMA from some sample values. The table below shows the values associated with the calculation of the 8-day EMA.
Price example | 8-day SMA | 8-day EMA |
||
We need a moving average for the first day. For this we will use a simple moving average as our starting value. This is the sum of the previous n values divided by n. On the ninth day, we have a starting value, which is the SMA of the previous 8-day prices.
Although the SMA is only required to give us an initial value for our EMA calculations, I have included a column of SMA values. Thus, you can see the comparative values of the exponential and simple moving average.
We also need to use a smoothing factor. This is determined by the number of EMA periods. Specifically, the equation for the smoothing value looks like this:
α = 2 / (n + 1)
Another way of describing what the calculation method does is to say that the EMA pays attention to past values and discounts their weight by 1 (1-a) per period.
From this, you can see that another, more complete name for the method is the exponentially weighted moving average model. Exponential Moving Average Forecasting is a widely used time series modeling technique in business because it works well over a wide range of conditions, although it is fairly easy to calculate.
The decision has been made for management to make decisions based on projections of future business performance. Such forecasts are often derived from EMA data models. An example moving average forecast might include looking at previous sales data exponentially smoothed to make forecasts for future sales.
Likewise, traders use the EMA to smooth out previous price data in the hope of capitalizing on the current trend.
In our calculations above, we only went back to include a small number of previous data points. The EMA will be more accurate the further back you go; however, ideally, much more of the previous EMA values should be included. Let's now see how to use the MT4 EMA indicator.
The exponential moving average indicator comes with as one of the main tools bundled with the platform. As you can see in the image below, the Moving Average indicator appears as one of the trend indicators in MT4.
Moving average in MT4:
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