A moving average (MA) is the average of the prices during a certain period of time. The most common is that the prices on which it is calculated are the closing prices, although, in the configuration of the indicator you can choose others, for example, maximum price, minimum price, opening, etc.
In themselves, they are an easy and simple way to smooth price action by offering a smooth correlation between the price of a currency pair.and the passage of time. The period of the moving average is the time interval over which the average of the prices is calculated, for example, a period of 5 will cause the moving average to be calculated on the last 5 candles, if we are on an H1 chart this is it translates into the calculation of the average over the last 5 hours if the graph is D1 the average will be calculated in the previous 5 days. The period is the factor that most affects the degree of smoothing of the moving average, the longer the period, the smoother the correlation between the price and the moving average. There are different types of moving averages, and each has some inherent degree of smoothing. It must be taken into account that the more smoothed, the slower the reaction of the moving average to price changes.
In the following image you can see how the moving average moves with the price drawing a line that is “smoother” than the price itself.
When you are ready to choose a period for a moving average keep in mind:
- The longer the period, the more smoothing and the slower reaction to price action.
- If the period of the moving average is very short, many false signals will occur.
- If the period is very long, the signals are generated quite late.
- In periods of lateral markets it is convenient to use periods longer than the usual ones.
Most common periods for moving average:
|Graphic||Periods for MA|
|Weekly||8, 13, 21|
|Diary||8, 13, 21, 55, 89|
|4 hours||8, 34, 55, 89, 144|
|1 hour||8, 34, 55, 89, 144|
|15 minutes||34, 55, 144|
There are several types of moving averages, simple, exponential, smoothed, and weighted. The most used, by far, are the simple and the exponential. Let’s look at the latter in detail in the following chapters.