WEBVTT 0 00:08.780 --> 00:14.400 The moving average is one of the most popular indicators used by technicians. 1 00:14.420 --> 00:17.580 We have three different types of moving average: 2 00:17.750 --> 00:24.290 the simple moving average, the weighted moving average and the exponential moving average. 3 00:24.290 --> 00:29.170 The simple moving average is just the average of all the prices selected. 4 00:29.180 --> 00:35.550 For example, let's say that we want to calculate the last five closing prices for euro-dollar. 5 00:35.750 --> 00:43.540 The first candle closes at 1.15. The second closes at 1.17. The third 6 00:43.540 --> 00:53.350 at 1.1550; the fourth at 1.16 and the fifth at 1.1650. 7 00:53.630 --> 01:01.940 So we need to do 1.15 + 1.17 + 1.1550 + 1.16 8 01:02.090 --> 01:08.600 + 1.1650 and everything must be divided by five. 9 01:08.900 --> 01:11.780 And we have 1.16. 10 01:12.080 --> 01:21.110 The general formula is a summation with K that goes from one to n of P K and everything divided by n, 11 01:21.590 --> 01:26.700 where n is the number of candles that we decide to analyze. 12 01:27.050 --> 01:30.600 So what if we want to analyze last five candles? 13 01:30.680 --> 01:33.480 This simply means that n is equal to 5 14 01:33.500 --> 01:41.390 and you need to add all the prices, starting from the first one, where k is equal to 1, till K equal 15 01:41.390 --> 01:42.410 to 5, 16 01:42.530 --> 01:44.970 that is last candle's price. 17 01:45.170 --> 01:51.520 Once you add all the prices, you divide by five because n is equal to 5. 18 01:51.530 --> 01:58.490 Don't worry this doesn't mean that you have to get a degree in mathematics to use the moving average. 19 01:58.490 --> 02:05.150 I have introduced the formula just to let you understand better what I'm going to explain later on. 20 02:05.750 --> 02:11.570 Anyway why do we call this indicator moving average and not just average? 21 02:11.630 --> 02:19.460 This is because every time that a new candle is formed, this replaces the oldest candle that was included 22 02:19.460 --> 02:21.940 in the calculation of the average. 23 02:21.950 --> 02:25.120 So let's take back the previous example. 24 02:25.700 --> 02:31.110 These five prices refer to the closing prices of the last five candles. 25 02:31.310 --> 02:37.870 When a new candle is formed on the market, the moving average will automatically replace the oldest 26 02:37.910 --> 02:39.910 price with the new one. 27 02:40.190 --> 02:46.490 So the moving average will not include 1.15 any more in this calculation. 28 02:46.610 --> 02:49.580 But we will have the new price. 29 02:49.580 --> 02:56.870 So let's say that the new price is 1.18, the new moving average level then will be 30 02:56.870 --> 03:07.070 1.17 plus 1.1550 plus 1.16 plus 1.1650 plus 31 03:07.070 --> 03:15.400 1.18 and everything is divided by five and we get 1.1660. 32 03:15.440 --> 03:20.500 So the moving average is moving up after the formation of the last candle. 33 03:20.510 --> 03:28.250 That's the reason of the name moving average and not just average. For the simple moving average, every 34 03:28.250 --> 03:30.870 price contributes in the same way. 35 03:31.010 --> 03:37.830 So each price contributes one fifth of the total moving average that we have calculated. 36 03:37.850 --> 03:45.650 This means that if we choose a small number of candles to calculate the simple moving average, the indicator 37 03:45.650 --> 03:50.120 will be very sensitive to every recent price action. 38 03:50.120 --> 03:56.840 This is good from one side because you can have a better understanding of recent price movements but, 39 03:56.840 --> 04:03.680 from another side, it is very easy to get caught in anomalous price movements that will give you false 40 04:03.680 --> 04:07.610 signals. To try to avoid the false signals, 41 04:07.610 --> 04:15.740 you can try with a longer term simple moving average, that has a smoothing effect, but it will be less responsive 42 04:15.740 --> 04:17.520 to recent prices. 43 04:17.870 --> 04:24.800 So you need to try to balance the advantages and disadvantages of having a short term and long term 44 04:24.800 --> 04:31.730 moving average. If you want to choose a long term moving average but you are afraid that you are 45 04:31.730 --> 04:35.240 not giving much importance to recent candles, 46 04:35.270 --> 04:38.480 you can have a look at the weighted moving average. 47 04:38.660 --> 04:43.400 This kind of moving average assigns different weights to each price 48 04:43.490 --> 04:49.010 and the most recent prices are weighted more heavily than older prices. 49 04:49.010 --> 04:54.260 You can also choose how to weight the data but I'm not going into it, 50 04:54.320 --> 05:02.870 otherwise this will become a course about technical indicators. Last type of moving average is the exponential 51 05:02.870 --> 05:10.010 moving average, that can be considered a special type of weighted moving average. The exponential moving 52 05:10.010 --> 05:17.780 average assigns progressively smaller weights to each of the past prices. Each weight is exponentially 53 05:17.780 --> 05:20.240 smaller than the previous weight. 54 05:20.240 --> 05:23.840 That's the reason of the name exponential moving average 55 05:23.990 --> 05:31.580 and this is probably the most used one by Forex traders. Before having a look at how to use the moving 56 05:31.580 --> 05:33.830 average with the candlesticks, 57 05:33.830 --> 05:36.850 we need to answer to three questions. 58 05:37.190 --> 05:41.220 What type of moving average are we going to use? 59 05:41.390 --> 05:50.630 How many candles do we include in the calculation? How to use the moving average? The type of moving average 60 05:50.630 --> 05:55.450 that you're going to use is a very personal choice. For this course, 61 05:55.460 --> 06:01.280 I would say that the moving average that makes more sense is the simple moving average. 62 06:01.340 --> 06:08.070 This is simply because candlestick patterns already focus on last candle formations on the market. 63 06:08.270 --> 06:14.850 So there's no need to use an indicator that puts more emphasis on recent price actions. 64 06:15.470 --> 06:20.420 Anyway I strongly recommend to try all the different types of moving average, 65 06:20.510 --> 06:27.230 so you will know better which one suits your trading strategy and which one helps you more to understand 66 06:27.230 --> 06:35.380 the market. I use the simple moving average when I analyze my long term investments on a monthly chart and 67 06:35.380 --> 06:38.620 I use the simple and the exponential moving average 68 06:38.630 --> 06:45.800 when I study other timeframes. The number of candles is another personal choice. 69 06:45.800 --> 06:52.720 I would recommend not to go under five candles and not to go over 200 candles. 70 06:52.730 --> 06:56.500 I personally like a period of 24 candles. 71 06:56.690 --> 06:57.980 Why 24? 72 06:58.130 --> 07:02.540 I consider 24 a magic number in forex trading. 73 07:02.540 --> 07:05.870 It fits almost all the time frames. 74 07:05.870 --> 07:14.600 If you use a 15 minutes time frame, 24 candlesticks will give you information about last six hours; if you use 75 07:14.600 --> 07:19.950 the hourly chart, you monitor what happened during the last 24 hours. 76 07:20.060 --> 07:24.430 If you use a four hour chart, you have 96 hours, 77 07:24.440 --> 07:26.830 that is exactly four days. 78 07:27.080 --> 07:35.110 So I love the number 24 in forex trading because it seems to fit perfectly every time frame. 79 07:35.370 --> 07:42.450 If I also want to have a long term moving average, I choose 120 as a period. 80 07:42.500 --> 07:47.680 Now let's face the most important question: how to use the moving average? 81 07:48.080 --> 07:54.080 There are hundreds of techniques that involve the moving average. If you search for them on google, you 82 07:54.080 --> 07:56.060 will find a lot of them. 83 07:56.060 --> 07:59.570 But I can guarantee that they will be effective. 84 07:59.570 --> 08:05.300 I will show you here the most important techniques to try to use this indicator together with the 85 08:05.410 --> 08:09.660 candlestick patterns to understand better the market. 86 08:09.680 --> 08:13.880 First one is comparing the price with the moving average. 87 08:14.090 --> 08:15.380 This is very simple. 88 08:15.380 --> 08:21.830 If the price is over the moving average, we can assert that the market is in an uptrend. 89 08:22.040 --> 08:28.190 If the price is below the moving average, we will say that the market is in a downtrend. 90 08:28.220 --> 08:35.210 This is obviously very general because it doesn't include two necessary factors like the time frame and 91 08:35.210 --> 08:37.370 the period of the moving average. 92 08:37.430 --> 08:43.910 It wouldn't make any sense to say that the market is in an uptrend if we are studying the moving average 93 08:43.940 --> 08:51.650 on a five minutes chart with a period of five candles. If you want to use this technique, my suggestion 94 08:51.740 --> 08:59.750 is to use a time frame of one hour or higher and a period of 24 candles or higher. 95 08:59.750 --> 09:05.900 The second strategy is using the moving average as support and resistance levels. 96 09:06.020 --> 09:12.170 Well, this doesn't need further explanation. I think it's quite self-explanatory. 97 09:12.480 --> 09:15.190 Last trading strategy I want to show you, 98 09:15.320 --> 09:23.290 is called the cross over and it needs two moving averages. One will be a short period moving average 99 09:23.510 --> 09:30.680 and the other will be a long period one. When the short term moving average crosses above the long 100 09:30.680 --> 09:32.150 term moving average, 101 09:32.240 --> 09:40.220 we have a bullish signal; when the short term moving average crosses below the long term moving average, 102 09:40.340 --> 09:42.710 we have a bearish signal. 103 09:42.800 --> 09:44.940 Why does this make sense? 104 09:45.080 --> 09:50.600 Because we have said that a moving average that includes a smaller number of candles 105 09:50.630 --> 09:53.570 is more sensitive to recent price action. 106 09:53.780 --> 10:00.920 So when the short term moving average crosses the long term moving average, it is showing that recently 107 10:00.950 --> 10:04.680 the price is deviating from the long term action. 108 10:04.760 --> 10:14.150 So it can initiate a new trend or simply a retracement from the main trend. Ok, I stop here to be boring with 109 10:14.150 --> 10:21.020 the theoretical explanations and I'm going to show you how to combine moving average and candlestick 110 10:21.020 --> 10:24.560 patterns to have a better view of the markets.