Moving averages
A line of the average price over the last N candles. It smooths noise, but it always shows the past.
Moving averages — what it is?
A moving average is the average price over the last N periods. A simple one takes the plain average; an exponential one gives more weight to recent values.
The indicator smooths price and makes direction easier to see. That is all it does: there is no new information in it, only recalculated old information.
Hence the limitation. An average always lags: the longer the period, the smoother the line and the later it reacts.
Moving averages — how it is built?
There is one useful application — as a direction reference on the higher timeframe. We do not use average crossovers as entry signals: they fire after the move has already happened.
Moving averages — common mistakes
Trading crossovers of two averages.
Treating an average as a support or resistance level.
Tuning the period until it lines up with past reversals. That is curve fitting.
Putting four averages on the chart at once and looking for meaning in how they weave.
Related to
Glossary
- moving average
- the average price over N periods.
- indicator
- a calculation based on price or volume, drawn on the chart.
- timeframe
- the period one candle holds: M5 is five minutes, H1 an hour, D1 a day.
- support
- a level price has previously bounced up from.
- resistance
- a level price has previously bounced down from.