Moving Average Indicators
Moving Average Indicators - This is one of the oldest and most important technical indicators. The moving average indicator is an extremely effective way for the trader to monitor the trend of the asset. There are two types of moving averages that trading signal providers use when generating signals.
The first is the Simple Moving Average (SMA). This is essentially calculated as the average of the last x periods where “x” is the time period under consideration. Many traders combine an SMA indicator with different time periods to get the best indicator of trend.
We can see in the example to the right a strong uptrend on the price of Bitcoin with three different moving average indicators.
Another moving average indicator is the Exponential Moving Average. This is quite similar to the SMA with the only exception being that the weighted version places more emphasis on the most recent price levels. Essentially, higher weight is place on these levels in the calculation of the moving average. This can be beneficial to the trader as it allows him / her to make the most informed decision when the markets are moving quickly.
Moving averages are lagging indicators. This means that they are as a result of events that have already taken place and are not necessarily predictive. However, where the moving average indicators is most useful is in establishing the strength of a market trend.
It is helpful for the trader to spot the trends through all of the market noise. In a similar fashion to the Parabolic SAR, the Moving Average can also point to potential reversals in the trend. A signal provider will also look at the moving averages to produce the signals. They will usually use an algorithm that looks at two or three different moving averages.
The algorithm will then set predefined rules on what signal to provide based on the levels of all of the moving average lines. If you are going to be following the signals of a provider based on the moving average indicator, you need to take the following risk management steps.
- Commit only a pre-defined trade size when entering. This should be no more than 4%.
- Trading decisions should always be based on the positions of a number of moving average indicators with varying time parameters
- Set buy and sell points that are the average of the previous 4 candle sticks