MOVING AVERAGE STRATEGY
Does it still make sense to use it?
Does it give hints about the future?
Are prices bouncing?
Why is it called moving?
How are the parameters adjusted?
Answers to these and other questions in this article.
Memorandum. What is a Moving Average?
The moving average (also called “MA” from the English Moving Average) is an average of the prices over a specific period of time. It is often used by traders to view the price movements of an asset as it “filters” sudden swings.
How is it calculated.
A moving average is calculated on candlestick data over a number of days. A 30-day moving average will require data over those 30 days, such as 30 one-day candles. Add the values of the 30 days and divide the result by 30.
It is called “floating” because the appearance of new candlesticks modifies the overall data and changes the graph line.
The moving average is one of the most commonly used tools by traders, alone or in addition to other indicators.
If you decide to use it alone you can think about exploiting the bounce on the line with a strategy on the bounces that we offer you to discover trading opportunities.
To understand how the rebound on the moving average line works, think of asset prices that fluctuate continuously within a certain range, with an upward or downward trend.
The strategy consists in identifying the phases in which prices enter a strong trend , and then move back towards the moving average. In this case they tend to bounce off the line and then resume their previous direction.
Settings.
We use an exponential average (EMA) to smooth out recent swings, showing the general direction of the trend. We set at 34 periods and use candlestick charts with intervals of 1 to 5 minutes. We can receive with this system several daily signals.
Naturally it is possible to modify the parameters according to your needs, remembering that the greater the period of the indicator, the more fluid the line will be , and vice versa.
How and when to open a position.
Call entry (purchase).
- The price chart is trending up, moving further away from the exponential moving average.
- The price then reverses, falling towards the indicator line and touching it, or falling slightly below it.
- If the following candle fails to close below the line and the price breaks above the indicator, this can be considered an entry signal.
In the example above, the graph moves up, then reverses and touches the indicator , bouncing in the same direction. The timing of the bounce could indicate a possible entry for a Call trade.
An example also for the condition Put (sale).
Let’s go over some practical theory.
What is a Moving Average?
The moving average (also called “MA” from English Moving Average) is an average of the prices over a specific period of time. It is often used by traders to view the price movements of an asset as it “filters” sudden swings.
How is it calculated.
A moving average is calculated on candlestick data over a number of days. A 30-day moving average will require data over those 30 days, such as 30 one-day candles each. Add the values of the 30 days and divide the result by 30.
It is called “floating” because the appearance of new candlesticks modifies the overall data and changes the graph line.
We also did an article on crossing two moving averages
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