Contents
- 1
- 2 Moving Average Deviation on the IQ Option platform
- 3 Trading with Moving Average Deviation
- 4 Pros and Cons of Moving Average Deviation (MAD)đź“Š
- 5 Comparison Between Moving Average Deviation (MAD) and Exponential Moving Average (EMA)🔍
- 6 Summary
- 7 Frequently Asked Questions about Moving Average Deviation (MAD)🤔
- 8 GENERAL RISK WARNING
Key Takeaways🔑
| →Moving Average Deviation (MAD) is a technical indicator that shows the deviation of the price from the moving average. |
| →MAD can be used in conjunction with Simple Moving Average (SMA) to generate trading signals based on price trends. |
| →Practice using MAD on a demo account before incorporating it into your live trading strategy. |
Moving Average Deviation on the IQ Option platform
An indicator you are going to learn today is called Moving Average Deviation. It is also known as the MAD or MA DEV in short. Moving Average Deviation indicates the deviation of the price from the moving average.
Set the chart
Log in to your IQ Option trading account. Choose the asset, the chart type and its period. Then, click on the indicators icon and select moving averages. Moving Average Deviation will be displayed on the list on the right side.
The indicator will appear in a separate window beneath the price chart. It will have a form of histogram bars that develop around the middle line of a value 0.
Each indicator comes with the default settings. In the case of the MAD, the period is set at 12 which means that the last 12 candles are taken into calculation. The source is ´close´ which in turn indicates that the closing price is taken to calculate the moving average. The type of moving average chosen is ‘simple'.
How do you calculate Moving Average Deviation?
The indicator bar is formed as a result of the moving average price substrating from the present price. If the value is positive, the bar will appear above the middle 0 line. If the value is negative, the bar will form below it.
The bars on the indicator histogram will appear above the 0 line when the price of the financial instrument plots over the moving average price.
You will see the bars below the 0 line when the price is beneath the MA price.
The bars will be green in colour when the asset's price is rising.
They will be red when the price is diminishing.
Is Moving Average Deviation same as EMA?
MAD is an indicator that is based on an average. The EMA is an exponentially moving average. They are two different species and should not be confused. Fortunately, they look quite different on a chart.
Trading with Moving Average Deviation
Moving Average Deviation is oftentimes joined with the Simple Moving Average with the period also set at 12. Consider the exemplary EURUSD chart below.
Pros and Cons of Moving Average Deviation (MAD)đź“Š
| Pros | Cons |
|---|---|
| ✔️ Simple to understand and use | ❌ May generate false signals in range-bound markets |
| ✔️ Can be combined with other technical indicators | ❌ Not as responsive to price changes as EMA |
| ✔️ Provides clear visual representation of price trends | ❌ Less effective in choppy or sideways markets |
Comparison Between Moving Average Deviation (MAD) and Exponential Moving Average (EMA)🔍
| Moving Average Deviation (MAD) | Exponential Moving Average (EMA) |
|---|---|
| Measures the deviation of the price from the moving average | A type of moving average that gives more weight to recent prices |
| Displays as a histogram | Displays as a line on the chart |
| Less responsive to price changes than EMA | More responsive to price changes than MAD |
| Often used with Simple Moving Average (SMA) | Can be used independently or in combination with other indicators |
MAD Signals to go long
There are a few conditions that should be met in order to enter a long position. First, the histogram bars should develop in positive territory and be green. Increasing the length of the bars shows the bulls accumulate strength. But we should not hurry, instead, wait for the correction in the price which might be visible as one or more red bars. Enter at the first green candle after that. Also, make sure that the price bars are developing above the SMA12 which indicates the uptrend in the market.
You can keep the position open until the candlestick crosses the SMA12 on the way down.
MAD Signals to go short
If you wish to open a position for the price decrease you should do it during a downtrend in the market. Check whether the candlesticks are formed below the SMA12. The bars in the MAD histogram should develop below the 0 line and be red in colour. When they get longer it signifies the bears are taking control over the market. Nevertheless, wait for the correction in the price in the form of a green bar. Enter at the next red bar.
Your transaction should be closed at the moment when the candlestick intersects the SMA12 on its way up.
Summary
The indicator called Moving Average Deviation shows the deviation of the price from the moving average in the form of histogram bars. They develop below or above the middle line of value 0 and can be green or red.
Add the Simple Moving Average as an extra filter and obtain trading signals according to the position and colour of the bars.
Go to the IQ Option demo account to practice using Moving Average Deviation. You will do it there without the need of worrying about your capital. The demo account is supplied with virtual cash that can be replenished whenever you wish.
Have you traded using MAD yet? Write about it in a comment below.
Have fun trading!
Frequently Asked Questions about Moving Average Deviation (MAD)🤔
- Q: What is the main purpose of the Moving Average Deviation (MAD)?
A: The main purpose of the MAD is to measure the deviation of the price from the moving average, which helps traders identify price trends and potential entry points. - Q: Can MAD be used with other technical indicators?
A: Yes, MAD is often used in combination with other technical indicators, such as Simple Moving Average (SMA), to generate trading signals based on price trends. - Q: How does Moving Average Deviation (MAD) differ from Exponential Moving Average (EMA)?
A: MAD measures the deviation of the price from the moving average and is displayed as a histogram, while EMA is a type of moving average that gives more weight to recent prices and is displayed as a line on the chart. - Q: Is MAD suitable for all market conditions?
A: MAD is more effective in trending markets and may generate false signals in range-bound or choppy markets. - Q: How can I practice using MAD before incorporating it into my live trading strategy?
A: It is recommended to practice using MAD on a demo account before incorporating it into your live trading strategy. This allows you to familiarize yourself with the indicator without risking your capital.