What is Moving Average? Types of Moving Averages, Advantages and Disadvantages .
Moving Average indicator is one of the most used indicator in all types of financial markets, moving average is very simple to use and its trading strategies are so simple to understand and implement that’s why it suit to an experienced trader as well as an newbie trader. The main goal of using moving average indicator is to find the direction of a current market trend. The good thing about this indicator is that it does not make chart difficult to understand after the implementation because there are so many indicator’s avail in our trading software those make our technical analysis & trend analysis reading too much difficult after the implementation of them on chart.
The process of market trend understanding is really very simple to understand after the execution of a moving average indicator setting, it does not matter what setting of moving average we are using the rule will be same all the time, so whenever the current market is crossing or goes above of the moving average then we assume that an uptrend has started in financial market, same like that if a market s going down below of the moving average the we assume that a downtrend has started in the financial market.
Furthermore for more clarification and understanding of the market most of traders like to use cross action trading strategies of the moving average indicator, which helps us to filter our trading signals with couple of nice confirmations, There are two types of moving average in an financial market they are as follows: Simple Moving Average, Exponential Moving average. Now the main question does appear that what is the main difference between a simple moving average and a exponential moving average.
Difference Between Simple Moving Average & Exponential Moving Average
A Simple Moving average indicator (SMA) is made up by the combination of Simple + Moving Average, is one of the moving average which does work on the bases on prior closing prices, in this moving average we are just calculating an similar weighting to all prior days data, that’s why its not that much effective moving average indicator compare to the exponential moving average. Lets have a look on Exponential Moving Average:
Exponential Moving Average indicator (EMA) is one of the top demanding moving average indicator in forex, stocks, commodities, etc. Because this indicator is more transparent and effective compare to SMA that’s why its better than the SMA indicator. The main valuable feature is the weight calculation, During the use of this indicator EMA we are giving proper weighted value to each trading day and that’s why this indicator is more quick and reliable than the simple moving average.
Here our main agenda is to understand these terms within a simple way, we are not sharing any mathematical’s formula with you because we believe that simple things are easy to read and understand rather than the formula’s. So means to say that the exponential moving average is the indicator that you have to select select during the use of an moving average indicator, so that was all about the EMA indicator which it called as an weighted moving average also.
Advantages & Disadvantages of MA Indicator:
1. Trend Analysis: The first main advantage is that this indicator does helps a lot to understand the direction of market trend, its very easy to use and implement that’s why the number one feature of this indicator is that the trend analysis become more easier to check with this indicator. Though market conditions are not same every day, and some time trend buy and sell signals or confirmations would be wrong also. You have to make sure that you are using price action analysis as well along with the indicator so that you can filter the trading signal wisely. The most popular moving averages are 50, 100 and 200 Day Moving average.
2. Market Reversal’s: Moving average does not only show you the trend along with it you can also use it during the market reversal or trend changing, but for that you have to use at least to moving average together for example and 50 and 200, during the uptrend if we see that market is reversing and going below of 50 EMA then it means a sell possibility will be there. But this type of situation will only appear if we are are following a strong uptrend only. Because uptrend process can be slower also and so many time it can go below of 50 EMA during the uptrend.
3. Support & Resistance: The another advantage is that moving average indicator provide a very good facility or picture of our market support and resistance, if you are a very new trader in forex, stock, or commodity market then moving average will be a best choice for you to calculate your support and resistance area’s, there is no doubt in it that technical analysis is one of the basic element of our trading strategy, and moving average does play an important to get a clear picture of our support and resistance areas.
1.Sideways Market Issue: Moving average is a good analysis provider in uptrend and downtrend market condition but in sideways market it does not give a good series of trading signals, so many time you can get false signals which can lead to so many trading losses so during the use of you have to be careful that in sideways market you don’t have to do trade with its signals. On the other hand as we had mentioned above that trade at least with 3 confirmations so that you can get more accurate signals to avoid losses in sideways market.
2. Late Trading Signal: The another disadvantage is that moving average indicator does not provide a fast trading signal especially when you are working with two moving averages then you would not be able to do trade on the right time, you will enter little bit late which can reduce the size of your trading profit or amount of pips. But still this is no an serious issue and can be managed wisely without any problem by a trader.
3. Limited Control: Same like as other technical analysis indicator’s moving average have limited functions, we are talking about the market psychology here, which is uncertain and it is not necessary that a rising trend will surge the market price up, you have to make sure that sometime market can take so many months to recover from sideways market issue and that type of market uncertain nature can make the indicator’s use limited here.