Posts
MA itself is a trend typed indicator, which is the indicator used to determine the trend that's currently happening in the market. Its widely used not only in the forex, if you already getting used with the stock trading and technical analysis, then surely you'll know about MA. The technical analysis are universal and can be used in any kind of market that's using collective data.
MA can also be derived again into a new indicator and completely different from the original indicator. If later you start to learn about the MACD (Moving Average Convergence divergence) then you will know that this indicator was originally one of the MA.
Moving Average has three different variants: Simple Moving Average, Weighted Exponential Moving Average and Moving Average. Each method is a moving average, the difference is just method used to calculate the average. However, way to read it remains the same and follows rules that apply to the Moving Average. In fact since the early 2000's, Moving Average is not just growing in 3 variants, but more than 5 variants that's different one another by their usage. To make it easier for your learning, our lesson will be focused only on the three type of MA.
Simple Moving Average (SMA)
Simple Moving Average (or usually called the Moving Average or also abbreviated SMA) is the most simple MA and does not use weighting in the calculation of closing price movement.
Note the picture Simple Moving Average 10 periods with the following:
Although simple, SMA is quite effective in determining the trend is happening in the market. It's also simple to read.In general MA can be used for the following:
1. Determine the trend that's going to happen.
2. Determine support and resistance point.
3. Smoothing other indicators that are too jagged.
MA application mostly used to predict the trend towards ( functionality no 1). While functionality no 2 and 3 does not widely used. We'll focus on the main purpose of MA, that is to predict trends. Functionality no 2 will be discussed at separated lesson.
Now let us note the MA with a period of 10 applied to the GBP / USD 1 hour period in the following chart:
Note the part that has been colored blue. When the price moves increase, MA located under the movement of currency. Conversely if the MA crossed with the Candlestick, and uptrend stopped and continued with the sideways. Or when uptrend occurred MA penetrate the price and move from the bottom to upwards, that is a sign that the uptrend has ended and then will be proceeded with the down trend.Well, what if we use two SMA with two different periods? The result will be very interesting. We will soon know how the results:
Easier isn't it? With the use of two SMA with two different periods we can more accurately predict where the price will be moved. If the two SMA curves have been crossed, there will be a change of direction in price's movement. In the picture above, when the MA with a smaller period (the period of 10) appeared below larger MA's period (the period of 15), there is an indication that prices are in a down trend. Vice versa, when the smaller period appeared above the larger period, then trend are currently rising (uptrend).We can also note that when the range between the two SMA becomes greater, there's possibility that current trend will continue. And if that range began to get closer, and going to be crossed again, it can be concluded that the trend has ended. Easy isn't it?
About the period MA commonly is used, unfortunately, until now there is no rule that's generally appropriate to use. Indeed, we'll need to practice and try it on different situation (trial and error). Please note that your use of the period can be changed according to your needs, because the condition of a currency that is dynamically moved from one time to another. However, based on experience, the recommended period for use should not greater than 40. So that MA does not lose its sensitivity as an indicator which will determine trend.
The greater the period of the MA, then MA curve produced will be wider, becoming less sensitive and does not accommodate dynamic changes in the price. Conversely, the smaller the period MA, MA curve produced become increasingly sensitive. In this case too sensitive or not sensitive at all won't be that good. The more sensitive MA curve, the more frequent false signals generated, and we'll make our trading loss. Conversely, the more insensitive the signal, then there will be less buying or selling signal so that we'll lose a chance to trade.
More details about the use of SMA to read the trend has been summarized in the as follows (SMA location : means):
1 SMA located under prices : Conditions bullish / rising trend.
2 SMA is located above the price : Bearish condition / trend to decrease.
3 SMA crossing price from the top : Changes to the bullish trend.
4 SMA crossing price from below : Changes to the bearish trend.
5 Shorter SMA period crossing longer SMA period from below : Changes to the bullish trend.
6 Shorter SMA period crossing longer SMA period from top : Changes to the bearish trend.
7 Longer SMA period located above shorter SMA period : Bearish condition / downtrend.
8 Longer SMA period located below shorter SMA period : Bullish conditions / uptrend.
That's brief explanation about the Moving Average. Do not forget to read the article from this blog to expand your analysis knowledge.
Weighted Moving Average (WMA)
The first question that arises in our mind should be about the difference between SMA with WMA? Of course there are differences. Different enough so that is classified into two parts. Not quite so many different names because they are alike and using the same methodology, only a different way.
Let's see. Which is the price that has a greater possibility to predict the price, the price in period of last hour or the price two months ago? Of course the last one hour. At least the price movement in the last hour will be more representative to predict the price compared with the price two months ago.
Or if our life, we'd like to buy a mobile phone. Of course we will find out the price of mobile phone in the last period. Well, perhaps we will pay more attention to price a day ago, compared to prices two weeks ago because the price movement will not vary much, especially with the price of one day ago.
The weighting assessment is calculated by the WMA. In the SMA, the weight of each price two weeks ago or even two days ago, have the same weight rating. WMA data on the newer data has a greater weighting than the older data.
Weighting value on the WMA will depend on the length of the period that we specify. The longer the period specified, then the larger the weight given to the latest data.
Overall, the rules on the WMA is the same as in SMA because of its calculations. They have only a difference in the weighting value. Here are the summary:
1 WMA located under prices : Conditions bullish / rising trend.
2 WMA is located above the price : Bearish condition / trend to decrease.
3 WMA crossing price from the top : Changes to the bullish trend.
4 WMA crossing price from below : Changes to the bearish trend.
5 Shorter WMA period crossing longer WMA period from below : Changes to the bullish trend.
6 Shorter WMA period crossing longer WMA period from top : Changes to the bearish trend.
7 Longer WMA period located above shorter WMA period : Bearish condition / downtrend.
8 Longer WMA period located below shorter WMA period : Bullish conditions / uptrend.
The picture below in this application is to predict the trend will occur with the use WMA. How to use it is exactly the same as the use of the SMA. Note the differences between SMA and WMA with the following picture:
And below the WMA with two different periods:
WMA looks more responsive to predict changes in trends in the GBP / USD. Each turnover point of the trend is located on the last Candlestick of trend that is currently happening. Note also in the picture above that there will be a change of trend from bullish to bearish. In this case the appropriate period selection also affect the precision of determining the trend.Well, here we have to know that the price weighting for each time has also a different value. However, if the WMA weighting method is the fastest method in determining changes in the trend? No. In WMA weighting, it do not include the previous WMA value. In the next section we will see method of moving average functions that involve exponential functionality in its weighting method. The result is earlier transition signal given in the chart.
Exponential Moving Average (XMA)
XMA is further development of SMA. As we know that SMA weighting is the cause of delay in the occurrence of changes in trend signal. Giving weight to the XMA is the same as the WMA, involving the period. The difference is, in WMA the longer period we use, the larger final value of its weight. On the other side, XMA, the longer period we used, the smaller final value of its weight.
Overall, the regulations on XMA is the same as SMA because of its calculations have only a difference in the value weighting. Summarized below:
1 XMA located under prices : Conditions bullish / rising trend.
2 XMA is located above the price : Bearish condition / trend to decrease.
3 XMA crossing price from the top : Changes to the bullish trend.
4 XMA crossing price from below : Changes to the bearish trend.
5 Shorter XMA period crossing longer XMA period from below : Changes to the bullish trend.
6 Shorter XMA period crossing longer XMA period from top : Changes to the bearish trend.
7 Longer XMA period located above shorter XMA period : Bearish condition / downtrend.
8 Longer XMA period located below shorter XMA period : Bullish conditions / uptrend.
The picture below is application to predict the trend will occur with the XMA. How to use it is exactly the same with the use of the SMA.
Picture below is the use of XMA period GBPUSD chart at 10.
And as with other MA, XMA is most often used with the 2 different periods:
SMA, WMA, XMA, which one is Better?That should be the last remaining question from our discussion about the Moving Average. Which variant of the MA indicator is the best?
From the bullish or bearish signal aspect, XMA is the indicator that can provide earlier signals than another two indicators. Of course, that's because XMA is created for eliminate limitation of another two MA variants described before. But if the question is which one is better, that should be highly dependent on the user.
As a guide, the sensitivity of an indicator will be very helpful to predict the price. But rather, the more sensitive indicator, the more they will also produce a false signal which could be a signal that will give incorrect prediction. That's why the use will should on the trader.
If you are a 'safe' trader, SMA may be more suitable than other variants. And vice versa if you're 'risky' trader (which also has the possibility to obtain profit as high as its risk of course), then XMA will suite you better because you'll get more responsive and faster signal. If you are a 'moderate' trader, please use WMA. Clearly, the indicator is just an instrument, we're the one that determine the decision based on guidance instruments.
In fact, if we see the calculation of Mean Absolute Percentage Error (MAPE), XMA will give a smaller error than the other. But it does not mean XMA is the absolute best. I deliberately did not include a calculation of the MAPE because it is very relative.
We will meet in the next chapter for the calculation by using other indicators. See you there.
