Moving Average

Moving Average




The Moving Average indicator is price based, meaning it’s a lagging indicator which displays the average price of a security over a set period of time.

The Moving Average indicator  is a good way to assess momentum and to confirm trends, and search for areas of support and resistance, being able to support a trading strategy.

Because a Moving Average indicator is a lagging indicator and reacts to events that have already happened, it can’t be used as a leading indicator, however can be used for confirmations and analysis.

A Moving Average indicator takes data of the closing prices over a specified time period and outputs their average price.

The time frames used can vary quite significantly depending on the type of technical analysis being done by the trader.  The longer the time frame being used the more lag there will be and the shorter the time frame the less lag there will be.

Moving averages with shorter time frames tend to stay close to prices and will move right after prices move were as longer time frames have a lot more cumbersome data and their moves can lag behind the market’s move much more significantly.  Any period under 20 days would be considered short term, and anything longer than 60 days would be viewed as long term.

Moving Average indicator

Crossovers

Crossovers are two Moving Averages of different term lengths on the same chart.  Like a 20 Day Moving Average and a 60 Day Simple Moving Average.

The potential trading signals occur when the shorter term MA crosses above or below the longer term MA.

A Bearish Crossover occurs when the short term (Blue) MA crosses below the long term (Pink) MA. (Image above)

A Bullish Crossover occurs when the short term (Blue) MA crosses above the long term  (Pink) MA. (Image above)

Trend

Using the Moving Average indicator to confirm a trend in price is an effective way of using the indicator.

The long term (200) Moving Average is on an downswing showing a Bullish Trend (In the Image above)

The long term (200) Moving Average is on an upswing showing a Bullish Trend (In the Image above)

It takes a considerable amount of movement in the market to cause the MA to change its course due to the large amounts of data involved with calculating a long term Moving Average, so a long term Moving Average isn’t very susceptible to quick price changes in regards to the overall trend in price.

Always be aware that the Moving Average indicator is lagging indicator. but when when used in conjunction with other indicators they can provide an added edge to a trading strategy or system.  And can help provide you with an indication of  where to trade in the correct direction.

*Please Note, Binary Options and Forex trading can carry a high level of risk to your capital as you could lose all of your investment. These products may not be suitable for every investor, therefore ensure you understand the risks and seek independent advice. Invest only what you can afford to lose. We are NOT financial advisers and we do NOT offer financial advice.