Whenever we talk about trend following indicator, the name of moving average definitely comes. You must have seen many times that even professioal forex and stock traders use this indicator a lot in their trading for their trading analysis. The good thing about this indicator is that its simple to adopt and easy to use on chart, you have to just choose the moving average that’s it you don’t have to do much settings in that and even if there is a setting then it would not be that much difficult to do.
As we know that following trend is very essential in stock market or in any forex market. It does not matter what we are doing but most of time every successful trader has this mantra that we have to follow the trend because if we are along with the big players we surely gonna earn consistent money from our trading. Big Players means the market trend here, its the momentum which tells us that which kind of momentum we gonna see in the future or which kind of trend we gonna see in future. Lets discuss about the moving average.
Moving Average: Moving average is one of the top leading and powerful trend following indicator. Moving Average is made by the combination of two words Moving + Average. Moving means something is moving , something is motile and Average means just a average calculation that we calculate based on the price movements. So we are just doing calculation on the bases of price movments here and at some point we have an average data like 20 days, 50 days, 100 days and 200 days (based on airtmetic numbers and weight)which tells us that what kind of trend we have in the market. The most common and widely used moving averages are Simple Moving Average, and Exponential Moving Average. Along with it the most common used settings for moving average are 8, 20, 50, 100 and 200. Lets discuss about the simple moving average indicator and later we will discuss about the Exponential Moving Average
Simple Moving Average:
Simple moving average is one of the very popular indicator in any financial market industry. Simple moving average indicator is made up by the combination of two words Simple + Moving average. SMA is a trend based indicator which just calculate the trend idea on the bases of past price movement history its just an airthmetic mean of recent market prices that is the movement of previous weeks or a past number of days.
For example 20 days simple moving average 20 SMA which indicates the average of last 20 days trend in market. There are some more like 50 Days Simple Moving Average, 100 Days Simple Moving Average, 200 Simple Moving Average. Simple Moving Average is an indicator which is less effective than the Exponential moving average that’s why it is called as a simple moving average indicator.
Exponential Moving Average:
Exponential Moving Average is more effective and valuable indicator than the SMA indicator. In Simple Moving Average section we had mentioned that EMA is more effective and this is the time when we should tell you that why its more effective than SMA. So listen in Exponential Moving Average we are just calculating the trend direction on the bases of weighted average method.
Means to say that we are calculating the every day movement here on the other hand in SMA we were calculating a number of day movements. Now you can understand that if we will calculate the movements on the day bases then what kind of analysis we will get from the indicator? That’s why we also call it as Weighted Moving Average indicator also because here we are putting more weight on calculating the analysis rather than the Simple Moving Average indicator.
Which One is best SMA or EMA?
According to our trading experience we believe that EMA is more better and valuable than the SMA and there are a lot of traders in this business who mostly prefer to go with EMA rather than the EMA. Though in some cases SMA can also help you a lot but if we have to select one, we would prefer to go with EMA.
Exponential moving average much faster and quicker than the Simple Moving average and Simple moving average is little bit slower than the Exponential moving average indicator. There are so many differ types of stock traders or forex traders in this industry and its totally depend upon you guys that which kind of moving average you want to use in your trading.
For better understanding you can start with a demo testing, for that you have to use 2 seperate charts for one single stock or forex currency pair. You can add both of these indicator’s on those charts and can compare the price movements and the result. If you are getting a good result from SMA go with it and if you are getting better result with EMA then for sure you should use it.
Characteristics of Moving average Indicator:
- Moving average is an very simple indicator to apply on chart. Just few clicks and you will able to see it on your chart and can easily check the direction of trend as well. Meanwhile trading success does depend upon so many factors not alone this indicator would make you successful. Support and Resistance knowledge and adoption would be must for traders.
- Trend is friend and we all know the value of our trend when we do trade in stock market, forex market, or in any financial market. During trending market Moving average is one of the effective trend following indicator. You just need a good area for your entry and you can enjoy your long term swing trading earnings with it.
- Moving average does also act as an support and resistance. This is really any fantastic feature of Moving average indicator.If you don’t know how to use support and resistance then this indicator would give you a lot of help to get your support and resistance areas on chart.
- Moving average indicator suits to all types of trading strategies. Most of trading strategies does allow moving average on trading charts, This is an flexible indicator which can be added with any type of traidng strategy on your trading charts.
- 200 Day Moving average is one of the powerful moving average indicator setting which you should always apply on your chart. It provides a very good information about the long term market trend.
Overall moving average is a very helpful indicator but in some cases you have to mix it with some other indicators as well as with support and resistance analysis. We would suggest you to learn about Support and Resistance properly. Train your brain properly with Technical analysis method. Know your strong entry points, do proper management in trading and don’t depend fully on an indicator.
whenever an indicator is saying buy this doesn’t mean that you have to buy. So many time you have to ignore it and you have to filter your indicator buy and sell signals with proper analysis of support and resistance. You should have at least 3 to 4 confirmations for your buy and sell. Hope you undestand, Thanks for reading