Home Beginner Trading Basics Trading Lesson: The Basics of Moving Averages

Trading Lesson: The Basics of Moving Averages

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The Moving Average is a widely used indicator by the financial traders. It is a graphical presentation of the average movement of the price and is a trend determining indicator. Financial traders of all kinds use the indicator a lot to determine the trend. For its consistency, it is used in many other indicators as the base of those indicators. Bollinger Bands and MACD are two of those indicators to name of.

Let us now demonstrate how a Moving Average is installed on a trading platform (MT4 Trading Platform).

Moving Average Installation Step by Step

We have to select and click on ‘Insert’ (Red boxed). After clicking on ‘Insert’ we get the screen below.

We select ‘Indicators’, Trend’ and then ‘Moving Average’. After clicking on ‘Moving Average’, we get the box below.

Attributes of the Moving Average

We get some options in the box such as Period, MA method, Apply to, and Style. A number is to be put into the period box. I have put/written 25 here. A point to be noted here is different periods are significant for different time frames. MA method gives us four options to choose from, such as Simple, Exponential, Smoothed, and Linear Weighted.  Four of those options have different things to offer. Have a look at the image below.

Four Methods of Moving Average

 

I have chosen ‘Simple’ here since ‘Simple Moving Average’ is the most commonly used Moving Average.

There are three more options such as ‘Style’ for the colour, width and style of the line.  After selecting all these to our preference, by clicking ‘Ok,’ we get the screen below.

Moving Average on the Chart

See a red line has been drawn on the chart.  It shows price direction by its graphical presentation. The main idea to use Moving Average in trading is if the price stays above the line, the trend is bullish; on the other hand, the trend is bearish if it stays below the line.

Time Frames and Period of Moving Average

The Moving Average works well almost with all the time frames. There is a catch. The bigger the time frame, the smaller time period works best with it. Moving Average 200 works excellently well on the 15M chart, but it does not make that much sense on the Weekly chart. The best to find this out is applying different time period on a chart and find out which one has been working well. However, in a nutshell, the best time frames for Moving Average are 15M, 30M, 1HR, H4 and Daily.

Best Currency Pairs for Moving Average

Moving Average being one of the most commonly used indicators, works relatively better with major pairs such as EUROUSD, GBPUSD, USDCAD, EUROGBP, EUROAUD, AUDUSD, NZDUSD, etc.

Conclusion

There are so many good strategies based on Moving Average, such as 3 SMAs, Moving Average Golden Cross, Moving Average Breakout, etc. We will publish those lessons here. Meanwhile, let us be acquainted with Moving Average by installing it and applying them on our trading platform.

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