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Chapter 11, Part II. Simple Moving Average. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 17, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Commander in Pips: Ok, so be it. Now I show you how to calculate it. Take a look – this is daily EUR/USD chart:


    Chart#1 EUR/USD Daily
    [​IMG]

    Here you can see a 7-period SMA as a green line. The software shows you its value on the right scale with green rectangle 1.4050 and in the table in left low corner. By the way, the table also shows that this is a Simple MA and has 7-periods – look at abbreviation “Sim, 7”.

    By red numbers I’ve marked for you periods (in our case period is a day, because this is daily chart), which close prices take part in calculation of MA.

    Pipruit: I see, but why we count them from right to left, and not as usual – from left to right?​

    Commander in Pips: I did it intentionally, because in the introduction to this chapter we said, that MA takes in consideration most recent number of periods. In our case they are most recent 7 periods. That’s why we count them in the opposite direction.

    Pipruit: I see. And why does our SMA have no value for most recent current bar?​

    Commander in Pips: Because we’ve chosen Close price as a basis for calculation and the most recent bar has not closed yet. So, it couldn’t be used in calculation. But tomorrow, to calculate our MA value, we will replace candle “7” with current bar that will be closed already. That is how MA indicator “moves” across price action. But let’s move to the calculation – here are close prices for the 7 marked bars:

    Period NClose price
    11.4185
    21.4207
    31.4137
    41.3988
    51.3882
    61.3978
    71.3973
    Now, you should calculate the average price…

    Pipruit: Ok, we should sum all close prices and then divide this sum on the number of periods… Let’s see:

    (1.4185+1.4207+1.4137+1.3988+1.3882+1.3978+1.3973)/7 = 1.4050​


    Cool – that is precisely what software shows… ​

    Commander in Pips: Yes. Now let’s understand what it means that MA indicator is “moving” across price action. Let’s move one day back, and imagine the same situation for yesterday.

    Pipruit: Well, in this case, our bar #1 will not take part in calculation, because it has not been closed yesterday. And we should take into consideration the bar that stands before #7 on chart #1. So, it should look like this:​

    Chart#2 EUR/USD Daily
    [​IMG]

    Commander in Pips: Great work, you’re absolutely right. So let’s check it. Software shows (in table) value for MA as 1.4005…

    Pipruit: Yes, let’s see…

    Period NClose price
    11.4207
    21.4137
    31.3988
    41.3882
    51.3978
    61.3973
    71.3869
    (1.4207+1.4137+1.3988+1.3882+1.3978+1.3973+1.3869)/7 = 1.4005​


    Hold on… I think I’ve got it. It turns out that all the numbers remain the same, except just one – for 7th period. Oh, I understand what means “moving” – tomorrow software will replace 7th bar at chart #1 in calculation with the most recent bar, i.e. bar for current day, and so on… It’s a kind of drifting follow up to price action – candle chart with each candle shows the closing price of a single period, but the SMA shows the average close price for the 7 most recent periods instead of just the current close price.

    And, is it possible to apply MA for other time frames? What will happen then?​

    Commander in Pips: Of course it’s possible. In this case the software will continue to calculate the value of SMA, but will take as a close price not the daily close but the close price of the chart’s period, that you will choose. For instance, if you will draw SMA on a 5-min chart, when each candle stands for a 5 minute period, thenthe SMA indicator will show you the average close for 7 past periods – i.e. 35 minutes. If you will apply it on an hourly chart- then for the 7 past hours and so on. If you hold the period number unchanged (7), of course.

    I think that any software currently includes this indicator in technical analysis tool pack. But you have to know how it calculated, just to apply it in proper way, understand all its advantages and disadvantages and to be able to edit and tweak its parameters Also you need this knowledge for correct usage of this indicator in your overall potential trading strategy.
     
    Hamza Samiullah and fran alvarez like this.
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