Chapter 11, Part I. Introduction to Moving Averages. Page 2

Pipruit: And let’s ask more, Sir - what is the big deal about the number of periods?​

Commander in Pips: Because, the higher number of periods in calculation of MA indicator – the smoother it is and the less sensitive to recent price action. It is easy to understand. If we calculate 3-period MA, then each period in the calculation has a 33% impact on the overall value. Hence, when a new period has appeared we can say that the value of the MA renews for 33%. And now let’s consider a 50-period MA. Here, each period in the calculation has only a 2% impact on overall value of the Moving Average. And if the market does not show real Doom & Gloom price action – even when the new period has been completed, the value of 50-period MA will not change significantly, because 49 numbers in the calculation remain the same and only a single number has changed. So, the more periods in am MA calculation, the slower it reacts on price movement.

Then, the opposite is true also – the shorter the term of the MA calculation – the more choppy it is and more sensitive it is to price action. It reacts much faster to recent price action.

Pipruit: So, does it mean, that if I want to make my MA looks smoother on my chart, I should add more periods to the calculation?​

Commander in Pips: That’s right. But be aware also, that your MA will become “lazier” in this case. Take a look at our chart – see, during small retracements the 5-period MA changes direction, but the longer term 25-period MA did not even feel it…

Pipruit: I see. And here is the main question, Sir – how we can use it?​

Commander in Pips: That IS the question and we will answer on it, but gradually and not in the introduction part of this chapter. First, as usual, you will have to know the basics. We will talk about the different types of MAs:

- Simple Moving Average (SMA);

- Exponential and Modified Moving Averages (EMA and MAV);

- Displaced Moving Averages (DMA).​

They have different calculation algorithms and you should study how to calculate them for a better understanding of their properties.

Only after that we will investigate how we can include MAs in our trading strategy, and surely will discuss the major ways of application of MA Indicator.


P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer soon.




Note: FPA ranks are earned in the battles against scam, not in the classroom.