ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Trading Moving Averages

Updated on January 25, 2016
one2get2no profile image

Philip retired from investment banking to write. To date he has written 9 books on trading forex, 3 short stories, and one poetry book.

Simple Moving Average

Most traders use technical analysis tools and indicators as well as fundamental analysis to help them decide when to enter and exit the market. In this hub I am going to explain one of the most popular and easiest to interpret technical analysis indicators - moving averages. There are three types of moving average, the simple moving average, the exponential moving average and the least popular and least used, linear moving average.

The simple moving average is a trend line which is plotted on a price chart. This line indicates when and where a trend is about to start or to end. A trend is a continuous movement in a particular direction.

For example the EUR/USD daily price chart below is showing a bullish upward trend over a period of time between September and October 2010. Each candlestick represents the price movement for a day and although within the general trend there were days when the price of the Euro dropped. Overall however, the the price gained a thousand pips in two months.

How the Simple Moving Average is Calculated

The simple moving average trend line is calculated by adding the closing prices of the currency pair over a specific number of historical time periods. For example if the specified periods were 1 day and the historical time period was 200 days, then the calculation is (200 x the daily closing price) / 200. This applies to any applicable period. The periods most used are 15 minutes, 1 hour, 4 hours, 8 hours, 1 day, 1 week, 1 month. The number of periods used depends on what the trader wants to use the simple average for. Below is an example of a simple moving average line for 200 periods, days in this case, as we are using a daily EUR/USD chart. This shows the general trend over a period of time but the line does not follow the price movements that closely. There are instances when the prices are above the trend line and some instances when they are below it.

Simple Moving Average Strategies

Most traders who use simple moving averages use several trend lines to indicate if and when a new trend is either beginning or ending. They do this by using at least two simple moving average trend lines. One of the trend lines will be the fast line and this line will be the most responsive to price change as it covers just 5 periods. The second trend line will be the slow line and this line is less responsive to price change and covers 14 periods. The chart below is the same EUR/USD price chart and I have added two simple moving average lines, a 5 period line in green and a 14 period line in blue. The 1st price chart is a 1 day chart, the second chart a 4 hour period chart and the 3rd is a 30 minute period chart. The theory behind using two simple moving average lines is that when the fast line crosses above the slow line this indicates a bullish trend. On the other hand when the fast line crosses below the slow line then this indicates a bearish market, a downward trend.

Daily Price Chart

As you can see from the price chart above the fast line (green) crosses the slow line (blue) around the middle of September confirming the bullish trend shown by the very slow red line. It then crossed back down over the blue line at the beginning of November confirming the bearish trend shown by the red line.

4 Hour Price Chart

The 4 hour chart above covers a time period from when the bullish trend started at the beginning of September, to the end of September. Notice how many times the green fast line crosses up and crosses down over the blue slow line during this period. This indicates intra day trends which might not always match the longer term trend.

30 Minute Price Chart

The 30 minute price chart above which covers the 6th of September shows an even more roller coaster intra day price movement than the 4 hour chart. See how the fast line crosses above and below the slow line many times during the day.

Exponential Moving Average

The exponential moving average is comparable to the simple moving average with the difference being that more weight is given to the most recent prices. So the exponential moving average reacts faster to changes in price. The same periods of 5, 14 and 200 are used and some traders even put in a 50 period EMA. I have used the same EUR/USD 1 day chart as the first one we used and instead of using SMAs I have used EMAs and added an additional 50 period trend line. The difference is slight as you can see but the EMA reacts faster. I personally prefer to keep to the SMAs because I feel that EMAs sometimes give a wrong signal because there is too much trading 'noise' around especially during volatile periods.

Linear Moving Average

This particular moving average has a much higher weight on the most recent prices. This works by taking each closing price for the period the moving average is being calculated and multiplies the price by its position in the series. If 13 periods are being calculated today's closing price would be multiplied by 13 and yesterday's closing by 12, and the days before by 11 and so on. Once summed they are then divided by the time period selected by the trader.

A Simple - Moving Average Strategy

Here is a strategy which I have used with some success in the past. I used two simple moving average lines, a 5 period fast indicator and a 14 period slow indicator on a 1 hour price chart. For a bullish trend I wait until the fast line crosses above the slow line and then wait until the current candlestick has filled completely. This means that on average you will wait a little less than an hour from the cross over before you trade. If the candlestick has confirmed an upward trend, enter a buy trade. Wait until the fast line crosses below the slow line before you exit your trade. As you can see from the EUR/USD 1 hour chart below, I did just that on the 20th January 2011 and exited on the 23rd January with a 142 pip gain. For a bearish trend do exactly the same thing except of course this time you will sell on the cross below the slow line plus candlestick and exit the trade when the fast line crosses above the slow line.

Incidently all the charts in this hub are taken from the FXCM Meta Trade 4 trading platform that I use.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)