In general, we can say that such indicators are quite good at showing the direction of the dominant trend. Their weaknesses include the facts that they are somewhat lagging and also do not work well during flats. The moving average is one of the simplest indicators. Mathematically, this is the average price of the financial instrument under analysis for the last n periods. The difference between the moving average and the simple average is that when the next price bar is formed, it is included in the calculation, and the bar which was the last onebefore that is excluded from the calculation.
Let us have a look at the figure. The latest current, instantaneous value of the MA at the point x indicated by a red circle, is a simple arithmetic average the sum of the values divided by their number for n last prices of this financial instrument. Area B, shown in the figure in yellow, is the averaging period, i. The longer the averaging period, the less flexible the MA will be, and the laterit will react to the emerging trend.
However, it will be better at filtering out small and insignificant price changes. The shorter the MA period, the more sensitiveit will be, but it will also react to price changes that do not comprise a trend. The arrow in the figure indicates the direction of movement for this period i. In the figure, we can see that at the beginning of the period under consideration there is a section equal to n designated as A , for which the value of the moving average with averaging period n cannot be determined, since there is not enough data.
As can be seen from the figure, the MA shows the general direction of the trend developmentrather well, smoothing out the small fluctuations in the price that are irrelevant for trading. Incidentally, we should note that the MA indicator itself can be considered as a simplest digital filter DF.
The lagging is due to the very nature of the MA. The lagging value is equal to half the averaging period. Completing the description of this indicator, we should note that there are many options for calculating moving averages. Also, another MA indicator can be used as input parameters and any other indicator whatsoever. By analogy, the price can be smoothed three times, four times, etc.
However, we must remember that each smoothing increases the lagging. Secondly, there are different types of moving average simple, exponential, weighted, smoothened, etc. In addition, there is a whole subclass of dynamic moving averages, which are supposed to adjust to the market. In a flat where the traditional MA performs poorly , the averaging period of the dynamic MA increases to reduce the number of false signals.
Once the indicator identifies the beginning of active movement, the MA period decreases sharply to reflect the emerging trend more flexibly. This indicator is constructed on the basis of two exponential moving averages and is calculated as the difference between them. Obviously, the fast moving average can be either above the slow one, or below it. Consequently, the values of the difference between them can be both positive and negative numbers. In the chart, these values are displayed in the form of a histogram as a rule , although they can be represented by an ordinary curve.
Also, the indicator has a signal line, which is a simple moving average of the values of the histogram. Thirdly, it is the divergences. A bullish divergence occurs when the MACD histogram forms new highs, and the price fails to form them.
A bearish divergence is the situation when the histogram forms new lows, and the price fails to do so. Divergences in overbought and oversold zones are considered to be the strongest and most significant signals.
Firstly, it is the intersections: Follow us in social networks!More...