Moving Average has four main types: SMA, EMA, SMMA, and LWMA. By optimizing the parameters of each Moving Average, traders can identify price trends, reversals, and support and resistance.
Moving Averages (MA) are indicators that traders must master because they cover technical matters in trading. Behind its convenience, MA turns out to have various types. In this article, we will talk about Moving Averages and the four main types that traders use when trading the forex market.
Moving Average Overview
Moving Average or usually abbreviated as MA is one of the technical analysis indicators popularly used by traders as a guide to the price trend. Moving Averages are used to see the momentum of the price movement while ascertaining the existing trend and determining support and resistance areas.
The data used is historical so Moving Average becomes a lagging indicator that analyzes, not predicts. It is a simple technical analysis to confirm bearish, bullish, or sideways trends.
What Are the Major Types of Moving Averages?
Moving Averages were developed to smooth out market noise and show market trends more clearly. Over the years, Moving Averages have branched out into several different types. The four major Moving Averages that are most widely used are as follows:
Simple Moving Average (SMA)
It can be said that Simple Moving Average (SMA) is the simplest technical analysis tool for traders. This tool filters market price fluctuations by averaging price values in the calculated period. For example, to get the latest price of SMA calculated over a certain number (N) of periods, all the prices of the N periods are added together, and then the amount is divided by N.
The value of the Simple Moving Average (SMA) is generated by the following formula:
SMA = (PRICEi + PRICEi-1 +......+ PRICEi-N+1) / N
PRICE is the closing price for each period participating in the calculation. And N is the number of periods, during which the indicator is calculated.
Exponential Moving Average (EMA)
An EMA is a type of Moving Average that predicts the direction of a trend in a certain period by giving more weight to the current price movement than in the past. In other words, EMA is more aggressive with the momentum of the latest price change than SMA.
To calculate EMA, several steps need to be considered. First, the Simple Moving Average needs to be calculated, then followed by the digger to weigh the EMA, and the last is to calculate the EMA of this period by taking the period from the initial EMA to the latest period, using the price, multiplier, and EMA value of the previous period.
The formulation of EMA is as follows:
EMA= α x [Ptoday– EMAyesterday] + EMAyesterday
Where α is a smoothing constant (part of the price value) whose calculation is fixed α = 2/(1+N) with N as the unit number of the period. EMAYesterday is a simple Moving Average value of the previous period. And Ptoday is the price value at today's close or N+1.
Smoothed Moving Average (SMMA)
SMMA (Smoothed Moving Average) is one of the widely used technical analysis tools to determine areas of support and resistance and market trends more clearly. SMMA makes sure to filter out price fluctuations (noise) by averaging the price value of the period. For the calculation process, it is almost the same as the EMA which adds weight values to the average price. The difference is that the oldest price data is never added while a new price is added to the calculation.
The SMMA value is calculated using the following formula:
SMMA = [SMMAi-1 (N-1) + PRICEi] / N
Where: PRICE is the current price value, SMMA(i-1) is the previous value, and N is the number of unit periods.
When the price rises beyond SMMA. This indicates that there is a bullish occurrence on the trading instrument. On the contrary, when the price falls lower, it shows a bearish condition. In addition to that, SMMA provides a broader view by 'smoothing' short-term fluctuations. This additional accuracy helps traders confirm market trends that have developed.
Linear Weighted Moving Average (LWMA)
LWMA (Linear Weighted Moving Average) is one of the most popular and widely used indicators. It is arguably a development of the Simple Moving Average, but its main drawback is its substantial lag behind the market price and the double impact of the same price on the calculation of the indicator. Both indicators smooth out the market noise and show the market trend more clearly.
To achieve the goal, the indicator filters out market fluctuations (noise) by averaging the price values of the period. However, in LWMA's case, some of the latest prices have the highest weights (weights) added to the average calculation and the weights will decrease linearly for each previous price. This process is used to calculate all the price values of the indicator so that it can be ascertained that the LMWA has an aggressive response to price changes compared to SMA.
LWMA is calculated by the following formula:
LWMA = [(Pn W1) + (Pn-1 W2) + (Pn-2 W3) +......] / ∑W
Where:
P = Price for the period, n = The most recent period, n-1 is the prior period, n-2 is two periods prior, and W is Weight for each period starting from the order of the highest weight, especially from the number of periods used.
What If They're All Compared in One Chart?
The Moving Average indicators have only one parameter, which is the number of periods. Possible values are from 2 to 10,000. The smaller the number, the fewer market noises the indicator filters, and the faster it reacts to changes in market prices. The line stays closer to the price bar, thus, following the short-term market trend and resulting in less lagging.
On the other hand, the larger the number of MA periods, the more market sounds are filtered by the indicator, and the slower it reacts to price changes. The line is farther from the market price bar, thus, following the long-term market trend and resulting in a more significant lag behind the market price.
To see the difference between the four major Moving Average indicators, you can distinguish it from the example price chart below. This figure shows a price chart with 4 MA variants; all of them use a period of 12.
The picture shows that Simple Moving Average experiences slight fluctuations that can give you wrong signals. The Smoothed Moving Average shows a smoother grinding than others. As for the Exponential Moving Average (EMA) and Linear Weighted Moving Average (LWMA), they have similar movements. The difference is that LWMA moves more toward the price while EMA is more responsive to the latest market price.
Other Types of Moving Averages
- Adaptive Moving Average (AMA): has low responsiveness to noise and minimal lag when determining trend reversals and changes. This MA does not fluctuate strongly when the price matches the increase so as not to cause the wrong trading signal.
- Double Exponential Moving Average (DEMA): smoothes out the price or value of other indicators. When the price moves in a zigzag fashion, DEMA will not produce false signals. This sustains position maintenance during periods of strong trends and reduces signal lag compared to regular EMAs.
- Triple Exponential Moving Average (TEMA): Synthesis of single, double, and triple EMA. The total lag is much less than for each of those MAs separately.
- Fractal Adaptive Moving Average (FRAMA): the smoothing factor is calculated based on the fractal dimensions of the current price. The advantage of the indicator is that it follows a strong trend and slows down drastically during the consolidation period.
- Variable Index Dynamic Average (VIDYA): This EMA has an average period that changes depending on market volatility. Market volatility is measured by Chande Momentum Oscillator (CMO) whose value is the coefficient for the EMA smoothing factor.
- Nick Rypock Moving Average (NRMA): This indicator is not part of the standard distribution of MetaTrader 5. This EMA is so trend-following that there are almost no fluctuations.
Here is the visual of the abovementioned Moving Averages:
DEMA and TEMA track price movements more accurately compared to regular EMAs. However, their constant fluctuations can give incorrect trading signals. Other indicators (FRAMA, AMA, VIDYA, NRMA) almost fluctuate and do not react to small price changes. In a trend, almost all indicators work in the same way.
Moving Average Keynotes
- All types of Moving Averages work well only when certain factors affect the market. This is great for a steady downtrend or uptrend. Whereas in the case of sideways movements, MA tends to be useless; traders should refrain from any trading activity during this period.
- When there is a spike, SMA cannot be used ideally because this tool assumes all prices are average values. In other words, it cannot react momentarily to sudden changes in market prices. If you find the incident, you may choose other types of Moving Averages such as EMA, LWMA, and SWMA.
- Keep in mind that the calculation of all types of MA only shows the market trend that has developed, not indicate the future trend.
Conclusion
Moving Averages are mainly used to identify forex market trends rather than giving trading signals as they are lagging indicators. They should be used with other technical tools such as price action to estimate the right time to buy or sell. By optimizing the parameters of the observed Moving Averages, a profitable strategy can be adopted.
Did you know that EMA is applicable to trade with a unique price chart like Heikin Ashi? Let's explore the strategy in The Complete Guide to Heikin Ashi EMA Strategy.
15 Comments
Jan 18 2023
In my opinion, in trading, one of the most important things is to know when we sell or buy an asset, you must be able to predict the future of a trading instrument. Analyzing market trends is a right that tends to be more important in my opinion. dasn yes of course all traders must understand technical analysis. Because yes, that is a trader's way of analyzing price movements using statistical tools, for example such as charts and mathematical formulas. Moving averages can be used as a tool to predict prices, but you should know that moving averages have many methods or indicators for calculating them. So you have to choose which one is right for you to use as an analysis tool.
Jan 18 2023
Here it is explained that the Simple Moving Average indicator is included in the four main moving averages and ranks first. SMA is included in the simplest technical indicators when using MA. But why is it that the unstable ups and downs trend tends to give wrong signals in trading. But why is SMA still included in the main moving average indicator?
What makes this Simple Moving Average indicator still used by many traders? Because as far as I know, the simple moving average is still the choice of analysis indicator which is still popular among beginners and experienced alike.
Jan 18 2023
Marvel: Indeed, when the market is volatile, the SMA method cannot be used anymore because it allows for wrong trading signals. So, my friend, here's a question, why is this SMA method still a popular method among many traders?
Indeed, my friends, as far as I know the SMA indicator generally moves rather slowly (lagging) to follow the latest price changes, so that at first glance the line seems to be moving away from the current price point. Because of this, the SMA indicator is more effectively used as a support and resistance line, or a price bounce marker.
So that, in my opinion, is the reason why this indicator is still popular among traders. Because besides being very simple in its formulation, to find out price movements more clearly with the SMA method.
Jan 18 2023
Diego: I agree with your explanation, even though the Simple Average sometimes gives false signals under certain conditions. However, because of the simplicity offered by this indicator, it makes SMA easier to use, especially for traders who still don't understand technical analysis. And yeah I think it's precisely the SMA that is the basis of all the various types of moving averages. SMA helps identify trends or changes while smoothing out extreme market fluctuations. Any price (open, close, maximum, minimum) or volume can be used as the basis for the calculation.
On the other hand, traders who want to avoid a lot of false signals can choose an MA with a longer period than the base. So you still have options to overcome this.
Jan 18 2023
Diego: I also want to add to your explanation, friend. Let the questioner be more confident and believe that SMA still has many benefits for knowing the direction of a market price including forex. Now, to anticipate false signals, taking a longer period is the best alternative.
The Simple Moving Average can serve as a longer trend indicator and also replace a trend line or resistance level (if the price is above the moving average it can act as support). Simple moving averages with longer periods can be used to identify trends, while shorter periods, or their crosses in the direction of the trend, serve as entry signals.
Jan 18 2023
Marvel: The most popular period combination among traders from the Simple Moving Average Indicator to overcome the presence of wrong trading signals is the MA50 and MA200 combination.
1) When MA50 crosses from below to above MA200, it is a signal to enter a long position (in this combination of moving averages, this cross is called a golden cross) or entry buy
2) when the MA50 crosses the MA200 downwards (a signal known as a death cross) and drops below it, it is a signal to enter a short or sell position
usually with 2 combination periods in the SMA, you will get a clear trading signal, be it a buy signal or a signal to sell the forex instrument.
With this, high school indicators are still in great demand.
Jan 18 2023
After I read this article, there are some things that I can understand about one of the tools for technical analysis with moving averages. It turns out that the Moving Average actually has a lot of indicators. And I am very grateful to the author who has chosen the 4 indicators that are the best of all.
Of the four types of moving averages described, I'm a little confused about the SMMA indicator. Why am I confused? Because I don't understand the function of short-term fluctuations, it can determine areas of support and resistance in the market more clearly. I think the SMA indicator can also use it like that. So what I want to ask is what is meant by "a smoother grinding"? and what are the benefits of smoothing these fluctuations?
Jan 18 2023
Jordan: Hello bro, I was also initially doubtful whether the SMMA indicator could help me read price trend signals. But after I studied this indicator, I already know that SMMA is worth finding one of the good moving averages to use as a trading tool. Why do I dare to say like?
The Smoothed Moving Average (SMMA) is indeed similar to the Simple Moving Average (SMA), with the aim of reducing noise rather than reducings. This indicator takes into account the entire price and uses a fairly long backward period. Past Prices are never excluded from the calculation but have very minimal effect on the Moving Average due to the low weight entered. By reducing noise, this indicator eliminates fluctuations and displays ongoing trends. SMMA can be used to confirm trends and define areas of support and resistance. This indicator is generally used in conjunction with other signals and analysis techniques.
Jan 18 2023
Jacky K: If I were asked to choose between Indikato SMA and SMMA, I would definitely choose the first option. Why am I like that. Because SMA is a simple indicator. And it can also help smooth out extreme market fluctuations. Well even though there are drawbacks, the advantages are still more than the disadvantages.
The smoothed moving average (SMMA) is simply a moving average that assigns weight to price data points over a long period of time. The indicator takes into account all prices and uses long look-back periods. Although old prices are never removed from the calculation, they have only a minimal impact on the moving average due to their low weight.
Jan 19 2023
Jacky K:
I totally agree with your opinion which states that SMMA is worthy of consideration in choosing a moving average indicator. This moving average is used to monitor price changes. The effect of the moving average is to smooth out the price movement so that the long-term trend becomes less volatile and therefore more obvious. When the price rises above the moving average, it indicates that investors are becoming bullish on the commodity. When prices fall lower, it indicates a bearish commodity.
Jan 20 2023
When it comes to determining trend reversals and minimizing false signals, how does the Adaptive Moving Average (AMA) compare to the Simple Moving Average (SMA)? Specifically, in terms of responsiveness to market noise, lag in identifying trend changes, and avoiding fluctuation that could lead to inaccurate trading signals. Could you provide insights into the key differences and benefits of using AMA over SMA in these aspects
And also, could you provide a detailed comparison of the Adaptive Moving Average (AMA) and the Simple Moving Average (SMA) in terms of their responsiveness to noise, lag in identifying trend reversals, and their ability to avoid significant fluctuations that could potentially generate inaccurate trading signals? Moreover, what are the key benefits and advantages of utilizing the AMA over the SMA in these aspects?
Jun 11 2023
@Jacklin: So, when it comes to spotting trend reversals and avoiding false signals, the Adaptive Moving Average (AMA) and the Simple Moving Average (SMA) have some interesting differences, my friend.
Let's talk about responsiveness to market noise first. The AMA is like the superhero of noise reduction. It's designed to adapt to different market conditions, so it can filter out all that pesky noise that can mess up your signals. It's like having noise-canceling headphones for your trading! On the other hand, the SMA doesn't have that fancy adaptability feature, so it might not be as effective in filtering out the noise.
In short, the key benefits of using the AMA are all about adaptability and accuracy. It adjusts to market conditions, reduces false signals, and reacts faster to changes. It's like having a trading companion that's always in tune with what's happening. But hey, don't discount the SMA completely. It has its own charm with its simplicity and stability, and some traders still find it suits their style.
Apr 11 2023
When it comes to technical analysis, the Triple Exponential Moving Average (TEMA) seems like a powerful tool. Based on the article, TEMA is a synthesis of single, double, and triple Exponential Moving Averages (EMA), and it offers a total lag that is significantly lower compared to each of those MAs individually. Now, I'm curious about its accuracy and how it compares to another popular indicator like the Moving Average Convergence Divergence (MACD). Can you shed some light on the effectiveness of TEMA in generating signals and identifying trends? How does it stack up against MACD in terms of accuracy and lag? It's always fascinating to explore different technical indicators and their strengths, so I'm eager to learn more about the advantages of TEMA and how it stands out in comparison to other moving average-based indicators like MACD.
Jun 17 2023
Hey there! Moving Averages (MA) sure do play a crucial role in technical analysis, don't they? We often associate MetaTrader with its nifty MA indicators, but have you ever wondered if there are other trading platforms out there that offer this handy tool?
I'm curious myself! It would be awesome to explore if there are alternative platforms in the market that provide Moving Averages as part of their technical analysis toolkit. I mean, variety is the spice of life, right?
And also, If there are any noteworthy platforms besides MetaTrader that offer Moving Averages, it would be interesting to know how they stack up. Are they just as user-friendly and customizable? Do they offer additional features or unique twists on using Moving Averages?
Jun 18 2023
@Jeren: Absolutely! Moving Averages (MA) are indeed widely used in technical analysis, and MetaTrader is known for its popular MA indicators. However, it's always good to explore other trading platforms that offer this valuable tool.
There are several alternative platforms available in the market that provide Moving Averages as part of their technical analysis arsenal. Some notable ones include cTrader, TradingView, and NinjaTrader. These platforms offer their own set of features and customization options when it comes to using Moving Averages.
For example, cTrader is known for its sleek and intuitive interface, making it user-friendly for traders. TradingView is highly regarded for its extensive charting capabilities and social trading features, which can enhance the use of Moving Averages. NinjaTrader is popular among advanced traders, offering robust technical analysis tools and the ability to automate trading strategies using Moving Averages.
So, if you're looking for alternatives to MetaTrader, platforms like cTrader, TradingView, and NinjaTrader are worth exploring. They offer their own strengths and features alongside the trusty Moving Averages, giving you a wider range of options to enhance your technical analysis and trading experience.