moving average

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The Moving Average (MA) is one of the key indicators in technical analysis which can be used when trading on Olymp Trade. It underlies a wide array of popular strategies. Represented by a line on a price chart, it reflects the average price of an asset over time.

Time is the central variable of the MA. It defines the range of values included in the calculation. Based on their strategy and preferences, traders choose a suitable type of MA and the number of periods to include. The latter is referred to as a window, a moving length, or a construction period. 

How to Build and Analyse MAs

Traders can use different variables to construct MAs. The closing price is the most common choice. Other options include the opening price, the maximum price, the minimum price, the average price, or the weighted average price.

MAs are very diverse. For the sake of clarity, we will focus on only two variations. These MAs are the most popular with Olymp Trade users:

  1. SMA — Simple moving average.
  2. EMA — Exponential moving average.

These indicators rely on different formulas for averaging, so they also look different within the same period. In the illustration, all MAs are 10-period ones (default setting).

Methods of use

  1. You can use MA to determine the direction of the trend on the Olymp Trade platform. When the MA is moving upwards, it is reasonable to buy the asset. In the opposite situation, a falling MA indicates that selling is preferable. To pinpoint the best moments for entry and exit, use other strategies, such as “Sliding averages” (focused on a faster MA).
  2. You know that an uptrend is about to begin when an upward reversal of the MA coincides with a positive price slope. On the other hand, a downward reversal coinciding with a negative slope signals the onset of a downtrend.
  3. You can use round periods MAs (50, 100, 200) as dynamic levels of support and resistance.
  4. Based on the direction of MAs particular period, traders determine uptrends and downtrends: short-term (50 and under), medium-term (between 50 and 100) and long-term (100 and over).
  5. When the difference between fast and slow MAs is the biggest, the trend is likely to reverse.
MA indicator

Disadvantages

The biggest disadvantage of trend-following strategies with MAs is the lag at entry. Traders risk missing out on a portion of the trend movement.

Secondly, it is a bad idea to apply MAs to flat markets. In this situation, these indicators can generate false signals leading to a loss.

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This post is also available in: Indonesia Português العربية

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