Moving Averages: Which ones you use and why?

[Forexwatchman]

In order to stimulate some discussion around here, lets all converse on the concept of using moving averages. Every trader knows about them, but I'm curious what MA's people on the forum use and how they use them in conjunction with their other indicators.

 

[markyy64]

In order to stimulate some discussion around here, lets all converse on the concept of using moving averages. Every trader knows about them, but I'm curious what MA's people on the forum use and how they use them in conjunction with their other indicators.

I use all the Fib Numbers on My Ema's on multiple time frame and all work as good support and reistance levels infact they are as similar to pivots where they get hit, worth a look

Mark

 

[Eric Alyea]

Glad YOU are bringing this up again

I'm glad YOU are bringing this up again. I wanted Pharaoh and others to get more descriptive of the "How's & why" of using Multiple moving averages (MMA), Like:
1. How they (MMA) benifit you in a overall view of (FX currency) trading pairs?
2. How to pick a (FX currency) trading pair from them (MMA) for price action?
3. ect. I have, more but someone has to share what they know.

When it comes to my "just woke up look" at the charts, I begin with the hourly where the bulk of my indicators are. I keep my charts very simple, so by bulk I basically mean my pivots, major support/resistance, trendlines, and moving averages (alligator). I then start checking all my sources for fundamental data as I like to have a solid up to the minute feel of where the market was while I was away and where it's headed. I then go back to the charts and see if the technicals and fundamentals agree. If so, it's probably gonna be a good day, if not I stick with what the technicals tell me.

As far as candlesticks go, I look for long wicks because they serve as great indicators of where price action will most likely reverse, as well as swing points to use for drawing fib lines. But it's the candle bodies that I use for drawing my support/resistance lines and not the wicks. My theory is that the wicks represent 'noise' while the body represents actual open and close levels. I also use that 'noise' when determining S/L; more noise means more liberal S/L.

My first look is usually with Guppy MMAs (multiple moving averages). I save candlesticks for later.

Of course, everyone has their own methodology. If there was a 100% sure method and everyone started using it, that would change the market enough to keep it from working.

Got a PM from Eric wanting more details.

Place these moving averages on your chart:

Short EMAs (Blue)
3, 5, 8, 10, 12, 15

Long EMAs (Red)
30, 35, 40, 45, 50, 60

People have used these on anything from tic charts to monthly charts.

What you look for is the lines squeezing together for a trend change or a pull back. When the lines begin to expand, that's when you jump in. You can buy a copy of Trend Trading by Guppy or do some digging around the web for more details.

I've even attached an MT4 template for you.

I'm not a candlestick guru. I do look for the basic patterns like shooting stars and dojis.

 

[Forexwatchman]

Thanks for bringing up Pharaoh"s Guppy MMA's, I've been looking into using MMA like the guppy and combined with solid trendlines you might have yourself a great trading system. I don't know because I've never actually tried it, but I'll let Pharaoh explain the Guppy system he uses first.

My moving averages usage and theories have changed quite a lot since i started learning about forex, but i want to see what others have to say first before sharing my moving averages experience.

Eric your questions are good ones that I'd love to see others try and answer in this thread. let's see what others have to say first though.

 

[Eric Alyea]

How you use Multiple Moving Averages

Dear Pharaoh,
I’m not the begging type, but if you need it I will.
Could you Please, Grace us with a detailed rundown of how you use Multiple Moving Averages, to:

I'm glad YOU are bringing this up again. I wanted Pharaoh and others to get more descriptive of the "How's & why" of using Multiple moving averages (MMA), Like:
1. How they (MMA) benifit you in a overall view of (FX currency) trading pairs?
2. How to pick a (FX currency) trading pair from them (MMA) for price action?
3. ect. I have, more but someone has to share what they know.

 

[Pharaoh]

OK, ok, here's the quick and dirty on MMAs.

I use MMAs for trend trading. Some people try to use them for reversals, but that never worked very well for me.

Place them all on your chart. You can use the Guppy ones if you like. Hull also has a set of MMAs, and there are others out there.

You want all your averages to be parallel, with none crossing. When there's a reasonable pullback/correction in a trend, the MMAs should bunch up, but not cross. When they start to unbunch and remain paralllel, the trend has resumed and it's time to jump in.

Personally, I like to check a couple of timeframes up to make sure I'm not trading against a bigger trend. I check one of two timeframes down to look for reversal warnings (but personally don't use these to trade reversals, just to either exit or bring my SL in closer to protect profit in open positions).

One note - make sure to not enter just before any of the really big news releases. This is purely technical trading, and a shock in something like NFP can easily wipe out that pattern you've been desperately waiting for an entry point on.

 

[D-Trader]

"the more you study, further from the way."
Try to know known and unknown. Use the simple ways. "This is how? and why.?"

D-Trader

 

[Forexwatchman]

Thanks Pharaoh for the details, and i look forward to hearing more from you in this thread!

I'm glad YOU are bringing this up again. I wanted Pharaoh and others to get more descriptive of the "How's & why" of using Multiple moving averages (MMA), Like:
1. How they (MMA) benifit you in a overall view of (FX currency) trading pairs?
2. How to pick a (FX currency) trading pair from them (MMA) for price action?
3. ect. I have, more but someone has to share what they know.

Since Eric has provided us with several very crucial questions regarding using moving averages, lets start by answering the first question.

So how can we use moving averages to give us some sort of beneficial overview of the currency pairs? The answer requires that you know what it is that moving averages do in order to arrive at any conclusions about their inherent benefits. In short, MA's give us a much smoother/easier visual representation of what the price action has been doing. So instead of a chart that’s littered with candlesticks that are doing all sorts seemingly random moves up and down, we get a solid line which depicts the AVERAGE price action over the time period in question. By exploring all the different ways of calculating that AVERAGE, you discover the real versatility of this indicator; the main types of MA's being smoothed, exponential, and weighted.

Without getting into too much more detail than that, we can see that moving averages provide us with:

1) information about the direction of the trend (up or down) of a given currency pair

2) the strength of that trend

3) and through combinations of MA's, the possibility of predicting reversals, retracements, or continuation of the main trend.

So with this one indicator you have the ability to see in one glance at your chart 3 crucial pieces of data for your trading strategy. Before I go any further with this discussion, I'd like to see what other members have to say about the above three points. How do you use MMA's (multiple moving averages) to determine trend strength and direction? How do you use them to determine reversals or retracements? What MMA system do you use, or do you stay away from them entirely?

 

[Eric Alyea]

Let's learn about what the “Pro’s” use

Let’s approach it this way. (This {FPA} is supposed to be a training facility). Let's learn about what the “Pro’s” use, one step at a time. They had to learn it some how, but won’t tell us. Just accept it, that’s the game play of the day.

What are we talking about.

Moving average - Wikipedia, the free encyclopedia

With out permission I am plagiarizing words with a credit to the sources (above & below).

In statistics, a moving average, also called rolling average, rolling mean or running average, is a type of finite impulse response filter used to analyze a set of data points by creating a series of averages of different subsets of the full data set.
Given a series of numbers and a fixed subset size, the moving average can be obtained by first taking the average of the first subset. The fixed subset size is then shifted forward, creating a new subset of numbers, which is averaged. This process is repeated over the entire data series. The plot line connecting all the (fixed) averages is the moving average. Thus, a moving average is not a single number, but it is a set of numbers, each of which is the average of the corresponding subset of a larger set of data points. A moving average may also use unequal weights for each data value in the subset to emphasize particular values in the subset.
A moving average is commonly used with time series data to smooth out short-term fluctuations and highlight longer-term trends or cycles. The threshold between short-term and long-term depends on the application, and the parameters of the moving average will be set accordingly. For example, it is often used in technical analysis of financial data, like stock prices, returns or trading volumes. It is also used in economics to examine gross domestic product, employment or other macroeconomic time series. Mathematically, a moving average is a type of convolution and so it is also similar to the low-pass filter used in signal processing. When used with non-time series data, a moving average simply acts as a generic smoothing operation without any specific connection to time, although typically some kind of ordering is implied.

http://www.investopedia.com/terms/g/guppy-multiple-moving-average.asp

What Does Guppy Multiple Moving Average - GMMA Mean?
An indicator used in technical analysis to identify changing trends. The technique consists of combining two groups of moving averages with differing time periods.

One set of moving averages in the Guppy Multiple Moving Average (GMMA) has a relatively brief time frame and is used to determine the activity of short-term traders. The number of days used in the set of short-term averages is usually 3, 5, 8, 10, 12 or 15.

The other group of averages is created with extended time periods and is used to gauge the activity of long-term investors. The long-term averages usually use periods of 30, 35, 40, 45, 50 or 60 days.

Investopedia explains Guppy Multiple Moving Average - GMMA

The relationship between the two sets of moving averages is used by traders to determine if the outlook of short-term traders aligns with investors who have a longer-term outlook.

Changing trends are identified when the two groups of moving averages intersect. A bullish trend is present when the short-term moving averages are above the long-term averages. Conversely, a bearish trend occurs when the short-term averages are below the long-term averages.

 

[Forexwatchman]

Thanks for the definitions Eric! That info will be useful for any traders still wet behind the ears, but I want this thread to be more practical and applicable to real-life trading. So with the definitions of moving averages aside, let's get into the nitty-gritty aspects of how we use them in retail trading to MAKE MONEY!!!

Let's review what we already know moving averages enable us to do at first glance:

Without getting into too much more detail than that, we can see that moving averages provide us with:

1) information about the direction of the trend (up or down) of a given currency pair

2) the strength of that trend

3) and through combinations of MA's, the possibility of predicting reversals, retracements, or continuation of the main trend.

So now let's take things a bit further: What indicators do successful institutional traders use to determine the 3 points mentioned above?

Quick Disclaimer: Through my years of studying forex, I have come across many forex traders whose opinions I not only trust, but still continue to read and study on a daily basis. It is from this constant continuing education that I've been able to assimilate the most common indicators and how they get used by the big institutional traders and money managers. It is from this experience that I reference whenever I claim any knowledge of their trading methodologies.

That said, lets start with a quick example of how moving averages simulate other very commonly used indicators.

Take the 21 EMA (expotential moving average) which gets used quite often on the lower timeframes by successful forex traders.

Try this experiment:

1) Open a chart and add RSI(14) and 21 EMA

2) Notice when price action arrives at the 21 EMA, the RSI is at the 50 mark. Also, if price action heads down so does the RSI.

Since RSI(14) is a very commonly used indicator (it's the default setting for the RSI in the MT4 platform), it would appear that we've found one example where one indicator mimics another one.

Anytime you have one indicator that successfully mimics another popular indicator, the next question should be: What added benefit do I get from this new indicator that I don't get from the previously successful one? Obviously it pays to watch what most others are watching when it come to predicting future price action, just like the fibonacci levels almost become self-fulfilling prophecies because so many other traders use fibonacci.

But I don't actually use the 21 MA at all in my trading. I just wanted to stimulate some thought as to how one indicator can include the features of another indicator, and then potentially build upon those features. Let's give things a minute to "marinate".