- 1 Moving average formula
- 2 Types of moving average explained
- 3 Pros and Cons of Using Moving Averages in Trading 👍👎
- 4 Comparison of Moving Average Types 📊
- 5 Frequently Asked Questions about Moving Averages ❓
- 6 GENERAL RISK WARNING
The IQ Option platform has dozens of built-in technical analysis indicators. Today we will show the moving average explained in full. This indicator is the most frequently used indicator not only on IQ Option but also on other trading platforms.
Moving average formula
A moving average indicator is a main indicator that shows price movement direction. When processing moving averages the mathematical pricing average of a particular period as measured by candlestick quantity. For example, in order to calculate the value of a five candlestick period the indicator divides the sum of their closing values by five. Then the indicator moves one candlestick forward and makes the same calculations in this manner.
A trader can build up a line of resulting values that has a more smooth chart direction. It smooths price bursts by indicating the current trend.
In case of an increasing period the price sensitivity lowers. But lag on the price chart increases. In the indicator settings you may choose the period of the candlesticks and from among for calculation methods.
What does a moving average tell you?
Moving averages primarily tell you about the trend in the market. We read information from the average based on its slope and position relative to the price. It is assumed that if the average is upward sloping, the trend is upward. If the average is downward sloping, the trend is downward. This is a simplification, as a 5-period average will give us different information from a 50-period average. We always adjust the period of the average to the time perspective we are interested in.
Averages always measure trends, which are measured in time. If I want to see what the trend was during the last hour on a 5-minute chart, I can, for example, use a 12-period average, which will calculate the average of 5-minute candles from the last hour.
In addition to the slope, it is also important, as I mentioned, the position of the price in relation to the average. It is assumed that if the price is above the average, we have an upward trend, if it is below it, we have a downtrend. This is also a simplification. During consolidation, the price breaks through the flat average many times upwards and downwards. And if it is difficult to determine the direction of the average, we should refrain from assessing the direction of the current trend.
Types of moving average explained
How do you explain a simple moving average?
The simple moving average or SMA is an average arithmetical value for a given period.
Exponential moving average
Exponential moving average EMA smoothing works by taking into account the current average value on a previous period with smoothing. The priority decreases exponentially and never equals zero.
Weighted moving average
The weighted moving average WMA assigns top priority to the current price hence the WMA chart does not depend heavily on dated prices. The priority of importance increases linearly.
Smooth simple moving average
The smooth simple moving average SSMA takes into account a large amount of candlesticks throughout historical quotes and is much more smooth.
Pros and Cons of Using Moving Averages in Trading 👍👎
- 💡 Easy to understand and implement in trading strategies
- 📈 Effective in identifying trends and trend reversals
- 🔧 Customizable by adjusting the period and type
- 📊 Can be used across different markets and timeframes
- 🔙 Lagging indicators, as they are based on past price data
- 🚫 Less reliable in ranging or sideways markets
- 📉 May generate false signals, especially during periods of high volatility
- 🔍 Requires additional confirmation from other technical analysis tools
Comparison of Moving Average Types 📊
|Moving Average Type
|Simple Moving Average (SMA)
|Arithmetic average of prices over a specific period; less sensitive to recent price changes
|Exponential Moving Average (EMA)
|Weighted average that prioritizes recent price data; more responsive to current price action
|Weighted Moving Average (WMA)
|Assigns higher weight to recent prices; responds faster to price changes than SMA
|Smooth Simple Moving Average (SSMA)
|Incorporates a large amount of historical data for a smoother line; less prone to erratic fluctuations
How to use moving average indicator
Moving Average is a great instrument of detection for a lateral trend wherein rules of trading that differ from rules of trend trading take precedence. Moreover when two indicators with different time intervals intersect it helps determine trend reversals.
We learned today about the main types of moving averages available on IQ Option. They differ slightly in their calculation method and appearance. However, the interpretation is the same for these types of averages. Today’s list does not close the topic of averages either. We wanted to give you a moving average explained in a basic way so that you can sit down at a chart and explore the topic yourself by working with charts. As always, we also encourage you to leave a comment below the post.
Frequently Asked Questions about Moving Averages ❓
- Q: How do I choose the right moving average period for my trading strategy?A: Experiment with different periods and types of moving averages to find the one that works best for your trading style, time frame, and market.
- Q: Can I use multiple moving averages on the same chart?A: Yes, you can use multiple moving averages with different periods and types to gain a better understanding of the market trend and potential reversals.
- Q: How do I use moving averages as a part of my trading strategy?A: Moving averages can be used as trend indicators, support and resistance levels, and as entry or exit signals when they cross over each other or the price.
- Q: Are moving averages suitable for all markets and timeframes?A: While moving averages can be used in various markets and timeframes, their effectiveness may vary depending on the market conditions and the chosen moving average type and period.
- Q: Can I rely solely on moving averages for my trading decisions?A: It’s not advisable to rely solely on moving averages, as they are lagging indicators. Combining them with other technical analysis tools can provide more accurate and reliable trading signals.
GENERAL RISK WARNING
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