Let’s dive into the moving average (MA), a handy tool I rely on for technical analysis that smooths out price data like a charm, giving me a continually updated average price. You can look at it over various timeframes—days, weeks, minutes—whatever suits your needs. Using moving averages in my trading strategy has some great benefits, along with a few different types to pick from. Whether I'm a long-term investor or a short-term trader, I can easily adjust my strategies for any timeframe. A moving average is a solid indicator that helps remove the “noise” from those annoying short-term price fluctuations.
I often pull up the MA indicator to make informed decisions on whether to buy or hold. The comprehensive features offered by Pocket Option for strategic trading enhancements include the MA integrated into their standard indicators and oscillators—it’s like having a cheat sheet!
How do I calculate the MA?
This moving average really helps clear up the noise on my price chart. By checking the direction of the MA, I can see which way the price is moving. If it’s trending up, the price is rising; if it’s down, the price is falling; and if it’s moving sideways, it’s pretty much stuck.
Calculating the moving average can be done in a few different ways. For example, a five-day simple moving average (SMA) takes the five most recent daily closing prices, adds them up, and divides by five, giving me a new daily average. Each new average connects to the last, forming that smooth line I appreciate.
If I want to mix things up from the default settings, I just click on the pencil icon next to the indicator and adjust the values to match my style.
Generally, the Moving Average acts as a trend line and highlights three major market conditions:
- Flat – candles hang out around the MA.
- Downtrend – candles chilling below the MA which is sloping down;
- Uptrend – the candles are above the MA which is going up;
Interpreting the chart and recognizing those MA signals is pretty straightforward. It’s important to review the default settings to pinpoint my timeframe. For shorter timeframes, like under M15, I use 21; for M30 to H4, I bump it up to 50; and for anything over D1, I set it to 100.
How do I use Moving Averages?
There’s a wide range of strategies that use moving averages. Experienced traders often suggest combining this tool with other indicators and oscillators for that added edge.
I’ve got my preferred techniques, and one of the best is to get in on a contract at that sweet spot where two moving averages cross over. I find that using MA 14 and MA 21 works pretty well across the board.
Simultaneously, MA 14 often acts as my signal. Another slick strategy is to place two moving averages on my chart—one longer and one shorter. When the shorter one climbs above the longer one, it’s a buy signal, indicating we're on an uptrend. Conversely, if the shorter MA drops below the longer one, it’s a sell signal—it indicates a downtrend.
Here’s how I manage MA trades:
- CALL option when MA 14 crosses MA 21 upward;
- PUT option when MA 14 crosses MA 21 downward.
No matter the timeframe, I ensure the expiration is at least two candles long.
Moving averages rely on historical data, so don’t get it wrong—there’s no magic to those calculations. Results can be pretty random at times. Moving averages perform well in strong trending markets but may struggle in choppy or sideways conditions. They smooth out price data to create that reliable line I can depend on.
Sure, adjusting the timeframe can help with some of those rough conditions for a while, but eventually, those issues crop up again, regardless of the timeframe I choose for my moving averages.
