How to use the Moving Average indicator?

A modern set of technical analysis tools for fix api trading on the Forex market is very diverse. Each year brings us new indicators, on the basis of which traders build their trading strategies. However, there is an indicator that is usually referred to the category of classical tools – all traders without exception know about it, it is used since the beginning of exchange trading on all types of markets. It’s about the Moving Average (MA) or moving average.

MA is an average price of a financial asset for a certain period. Averaging of any indicator is a popular technique used in statistics, economics, physics and other scientific disciplines. Averaging serves as a specific filter that allows you to isolate the trend from the market noise. It should be noted that MA is used in fix api trading as a stand-alone indicator, and as an integral part of more complex indicators of technical analysis.

In our time, several methods of MA calculating are used in trading:

  1. arithmetic moving average (MA);
  2. exponentially weighted moving average (EMA);
  3. linearly weighted moving average (WMA);
  4. smoothed moving average (SMMA).

Each average received by these methods has its own characteristics of reflecting the market dynamics, which makes it possible to effectively use and combine them in trading on the fix api Forex market. Such a set of МА calculation methods together with a wide choice of calculation period allows to form an almost unlimited number of variants of this technical analysis tool.

There are several ways to use MA:

  1. Trend determination – the tool allows you to visually show the current market trend for a selected trading instrument
  2. Formation of resistance/support levels – a properly matched MA period allows the tool to be used as a resistance or support line for the price of the market asset;
  3. Formation of the level of setting the loss limiter for the market order (Stop Loss) – the use of MA as a resistance/support line allows the trader to form a level of placing the Stop Loss of the market order above or below the moving average;
  4. Determination of the point of trend change – the use of two MA with different periods in the fix api trading allows you to determine the moment of a break in the market trend and change the current trend to the opposite.

I listed only the most basic examples of using MA in the financial markets trading, but of course, this list is far from complete. MA is also used as a criterion for selecting assets in the portfolio trading, for filtering the trading signals and constructing other indicators of technical analysis. Trading systems based on several indicators in most cases also include some variants of MA. Especially good results are shown by the combinations of MA with RSI and Stochastic oscillators. Moving averages are used in identification of many popular patterns in graphical analysis of the markets.

Despite all its advantages, MA has two fundamental drawbacks, imposing significant restrictions on their use – lag and false signals. Indeed, this tool clearly demonstrates the features of the market price dynamics in history, but it is very late compared to the current price. In this case, the delay period increases with the increase in the average period. In addition, the use of MA as a technical analysis tool gives the trader too many false signals ( during the market flat period.

In conclusion, I would like to recall the popular market saying that moving averages earned more money for traders than all the other technical analysis tools taken together. Indeed, MA has been used for more than 100 years in all markets for all the trading instruments. MA is included in the sets of all trading platforms offered by the fix api forex brokers to their clients. This tool is able to help any trader to form his unique trading strategy, but to do this, they will need long hours of experimentation, search, trial and error.

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