Articles

Today we are going to deal with such a computer indicator as Simple Moving Average - MA. This is one of the simplest indicators, but at the same time it is the most popular and commonly used indicator with traders all over the world. Formula of the indicator is not complex: as a rule, the closing prices of several last candles (bars) are totaled, and the sum obtained is divided by the number of the candles. It means that we obtain the average price for several days, hours, minutes, etc., depending on the time interval which the indicator is applied to.

Number of the last candles used for the indicator calculation is determined by the period. If, for example, the period on the day price diagram is three, it means that MA will indicate the average price for three days. If the period is 20, it means that the indicator will display the average price for the last 20 days. In this case, the aim of price fluctuations leveling within the considered period, i.e. noise filtering and the main trend discerning is pursued.

In this example, the red line implies MA with period 20 on the price week diagram.

Of course, dear reader, you may have quite a sound question: in what way can this indicator help in the work in financial markets, or simply saying, what do I need it for? In order to understand useful properties of MA, let consider the following example. Let us imagine that you are looking at a price diagram and it is difficult for you to decide whether you are going to sell or buy.

You have a jumble of ideas and

the monitor looks like mysterious Malevich Black Square.

In this case, MA may act as a light in dark, which prompt what position is more preferable. The next picture clearly shows one of the signals which we may use in our work.

MA slope indicates the trend direction:

If the slope is directed upwards, bargains for purchase are more preferable.

If the slope is directed downwards, bargains for sell are more preferable.

If the slope is horizontal, opportunities of bears and bulls are equal.

Now we will leave only arrows on the diagram:

Here it is, one of the secrets of financial trading!

Let us restore the price diagram:

This example illustrates how useful it is to add MA indicator on the price diagram for defining the prevailing trend and to try to open positions in the direction shown by the indicator.–

In this connection, you will surely have new questions:

• What period is most suitable for work?
• How long is it worth following MA slope?

Have some patience, dear reader, we will answer these questions and consider other MA signals during next lessons.

The schedule of next lessons:

2. How to choose period and apply Fibonacci numbers

3. Crossover signal

4. MA types, Alligator of Bill Williams

5. MA application in combination with other indicators

6. Construction of the trade system, including use of MA and other indicators.

Have a nice day! Alex Sabodin.
Pro Finance Group Inc.