Forex Time Frames Beginners Guide

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Types of Moving Averages: How does it work? A detailed Guide 2021
fxreviewtrading.com/articles/types-of-moving-averages
Moving average is an effective technical indicator used for analysing the market
trends. Traders use the averages to predict the prices based on recent previous price
changes. Thus, a statistical tool for calculating the data by taking the average of different
data sets. Primarily a stock indicator, still moving averages work in various markets to
analyse the price. The main purpose of using moving averages is to be constantly updated
about the average prices. These average prices help traders identify the price fluctuations
over the time period.
There are various types of moving averages used in the market analysis depending upon
the trading instrument traded. Here, we have listed the moving averages that could be
used for trading:
5. Linear regression
7. Time series forecast
8. Wilder moving average
9. Weighted moving average
Moving Averages: The details
Moving average is the trend indicator and determines the support and resistance levels.
Traders through the average follow the trend or lagging as this is a price-based indicator.
Lag refers to the financial sign that a huge shift has taken place in the market. Therefore,
the long period of moving average is the more significant lag. So, we can say that a year’s
moving average would have more lag than a month. These are substantial trading signals
used by investors and traders of the financial markets.
Traders can even customise the indicator as per their needs and time frames to have real-
time balance levels. Timeframes mostly used are 15, 20, 30,50,100 and 200 days. For real
price changes, traders must use long timeframes; shorter moving averages have less
accurate price changes and could be prone to uncertainties.
Traders can go for various timeframes based on the objective of the trade. Short term
timeframes suit the short investments, and long timeframes suit the long term
investments. However, traders can experiment with the timeframes, as there’s no set rule
of using the timeframes in moving averages; anyone could go along the trade affected by
the markets and the trade conditions.
Investors can keep experimenting till the one timeframe that suits their needs is found.
However, analysing the markets is not easy; investors must use technical tools and
research to have better predictions.
Trends that investors study in the market by analysing the markets work as an aid for the
securities traded. Such as a rising trend represents the uptrend, a downfall in the moving
average shows the downtrend. Similarly, the bearish and bullish trends are also analysed
through moving averages.
Moving averages are a good tool to be used and form a base for other advanced technical
indicators.
Types of Moving Averages
Moving averages are used in various forms, and understanding their operation in the
financial market is necessary. Without mastering the art of utilising these, one cannot
trade and earn the desired profits. So, let’s quickly have a look at all the moving averages
types:
Simple Moving Average ( SMA)
Simple moving averages are calculated by the simple formula we used in our maths in
school times. Traders have to collect all the recent prices data and then divide the total
prices by time period. This would give traders the average of prices over that specific
timeframe.
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Usually an indicator of change and when traders can enter and exit the market. SMA
works as a lagging indicator as they find moving averages on the past prices for certain
time frames; the costs could be high, low, open and close.
SMA signals traders about the buy and sell of securities and using the support and
resistance levels. The floor and ceiling of the price changes, moving averages, and other
signals could be studied using charts and patterns via trading platforms.
Exponential Moving Average (EMA)
The word exponential stands for rapid growth in something, so, here, the exponential
moving average calculates the recent price changes and provides traders with the most
responsive price data. Thus, examining the rapid increase in the price changes in the
timeframe.
In comparison to SMA, the exponential moving average is more accurate as it gives equal
weightage to all the price changes in a specific time period.
Calculating EMA:
The first step of calculating EMA is by knowing simple moving averages. Then, traders
have to calculate SMA to get the primary data over time.
Secondly, traders calculate the multiplier; this helps to weigh the exponential moving
average.
The third and last step of the calculation derives EMA by taking the recent time period
EMA, price, multiplier and previous EMA.
The formula for EMA:
EMA = { Closing Price – EMA (Previous time period) } x Multiplier + EMA
(Previous Time Period)
Weighted Moving Average (WMA)
Most widely used moving average for deciding the trade direction and making buy and
sell orders. The weighted moving average uses recent price data and gives less weightage
to the previous price changes. The formula of weighted average multiplies each data by a
weighting factor.
The WMA aids traders to analyse the trade signals; with the price being above the
weighted average, traders can conclude that the trend is upward, and if the prices are
below WMA, then it signals a downward trend.
Double Exponential Moving Average (DEMA)
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An advanced and improved version of the exponential moving average is the double
exponential moving average. The moving average allocates more weightage to the recent
previous price changes and data. Thus, it reduces the lag and becomes more responsive
for the short term trend. In addition, it also spots the reversals of the trends quickly.
The DEMA could be spotted on the chart and patterns of the moving average through
various lines indicating all the types of moving averages.
The Triple Exponential Moving Average (TEMA)
Patrick Mulloy developed the triple exponential moving average after the evolution of the
double exponential moving average in 1994. TEMA is more responsive and advanced than
DEMA. Thus, it analyses the price changes and reduces the lag of exponential moving
averages.
However, the work of both the responsive exponential moving average is similar to each
other. Both minimise the difference between various exponential moving averages.
But, the two are different, as the formula of TEMA has triple-smoothed EMA. It is in
addition to the single and double smoothed exponential moving averages incorporated
into the DEMA formula.
Linear Regression or Least Square Moving Averages
The linear regression calculates the least-squares regression lines to find future
predictions based on the current time period. Thus, traders, through the regression lines,
identify the changes that could take place.
Linear regression is intended via the sum of least squares method; it discovers the straight
line that fits the specific period.
Displacing the Moving Average
The moving average type shifts all the price values of moving average to forward and
backwards in time. The method helps traders analyse the price changes more accurately
and understand the securities’ trends and price fluctuations. It could be shifted to align
with the highs, lows and prices.
But, the use and work of the DMA is similar to the moving average and determines the
trend and reversals of the price in the financial market. Through the signals of the moving
averages, traders can forecast support and resistance levels.
Time Series Forecast
A statistical method of calculating the time-series data of price is called a time series
forecast. The type of moving average aids traders in making strategic decisions and
making predictions relating to the trade. However, the forecasts are not always exact and
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can vary widely as the market factors are pretty fluctuating.
With comprehensive price data and details, the predictions could be exact and help trade
with the decisions. The type of moving average is used in various sectors such as weather
forecasting, economic forecasting, retail forecasting, financial forecasting, environmental
forecasting etc.
Wilder Moving Average
Wilder moving average is also called wilder’s smoothed moving average. The indicator of
the financial market works similar to the exponential moving average. The wilder moving
average responds more to the slow price changes that occur in the market.
The trading platform available with the brokers is used to apply these moving average
indicators. For a wilder moving average, traders can go on the charts and from the edit
through the studies option where traders can choose wilder moving average options and
add them to the study. Moreover, the parameters of the chart could be set as per the
traders’ needs.
How do Moving Averages work?
Moving averages are the best and popular technical trading tool. If the indicator of change
is used with proper knowledge, it could benefit traders in manifolds. But, some fewer
investors or traders can use these signals of the market adequately. So, for making it clear
and helping traders with the best tool, we have discussed the use of moving averages and
how traders can apply the tool.
The use of moving averages in the financial markets is significant as it signals traders
about the price change, trend direction and entry and exit points. Various markets use the
tool as per the requirement due to its flexibility.
The chart and pattern option is available through the trading platform, mostly the
MetaTrader4 platform. Traders can use the moving average indicator through the
platform by customising it as per the trading instrument and market. The chart provides
all the information and details of the price movements, reversals and future movements.
Even the timeframe of trade is decided by the traders, which help them to set it and
analyse the specific time period change of price.
Once, through the setting of the chart, traders set all the measurements and
requirements. Now, they can read and study the future changes with past and present
market prices. The previous recent price movements and present price act as the signal to
decide on the future. Thus, traders predict the change of price based on the chart lines.
If the chart shows an increase in the graph, the chart lines move upwards, which is a rise
in price. Similarly, the lines show a downfall; it is a decrease in the price of the security.
Although the price keeps moving to and forth, that is sideways movement, this is an
indicator of range in the security price.
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Therefore, traders use the indicator of moving averages due to the clear indication of the
price change. Moreover, traders do not have to be present 24 hours and keep an eye; they
can access the trading platform chart through a mobile application or any other device
whenever they want to check. As a result, traders can buy the best available security and
earn profits.
Moving Average Disadvantages
We have discussed moving averages in-depth with their types, use and work. Here, we
have also incorporated moving averages disadvantages for knowledge of the traders and
investors.
Historical Data
The data used in moving averages is historical, and therefore the price changes are also
based on past trade and price fluctuations. So, the decisions could be wrong as they would
better suit the past price changes and not the present.
Random
As the data are historical and results are past based, the decisions of such data are
random. The market may sometimes work in favour of the moving average and may even
go against it. Traders can not completely rely on the indicator.
Price Action
The price keeps swinging back and forth, which results in multiple trend reversals and
signals. It could be confusing, so traders should use other indicators for perfect decisions.
The ranging conditions of the financial market make it challenging to analyse the market
price changes.
Conclusion
Price analysis is the main part of any investment strategy, making trend direction visible
for the traders. To have the technical aspects of the market, moving averages is essential.
No trader would be able to make correct forecasts without the use of types of moving
averages. The statistical data, price changes and technical analysis all together simplify
the process.
These are popular strategies for entry and exit of the market, highlighting the support and
resistance levels. The indicator, however, is available only through online brokers.
Therefore, traders must go for reputed brokers with all the facilities; traders can go for
ROInvesting or TradeATF to use moving averages indicators.