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Chapter 11, Part II. Simple Moving Average. Page 3

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

    Aug 28, 2009
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    Now let’s point on some important moments of the MA Indicator.

    - First, and the most important quality, that any MA is a lagging indicator, because it is based on past price action, although usually fairly recent prices;

    - The longer the period of SMA the more “lazy” it is. This quality is derived from the math formula – it’s just how math works. Because, the higher number of periods in the calculation of any MA indicator – the smoother it is and less sensitive to recent price action. It is easy to understand. If we calculate a 3-period MA, then each period in calculation has a 33% impact on the overall value. Hence, when new period has appeared we can say that the value of 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 the overall value of the Moving Average. And if market does not show real Doom & Gloom price action – even when 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 any MA calculation – the slower it reacts to price movement;

    - MA Indicator smooth market price action and shows us a general picture of the market’s sentiment and direction – whether it trending up, down or sideways;

    - MA Indicator could be applied for trend estimation as a simplest one;

    - One of the major qualities of a Simple MA is that it points equal weights to all periods in calculation, rather than give more weight to most recent periods and less weight to later periods. For example, if we calculate 10-period SMA and some crazy spike has happened 9 days ago – it will have the same weight in calculation and impact on overall value of the MA as the most recent close price.
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