Moving-average (MA) are traditional indicator that are commonly used by traders, both beginner traders as well as skilled and professional traders. Its usability and brilliant capacity to peruse (detect) long-term trends make the MA as the first known indicator of novice traders. There are numerous variants of the MA created by experts. Starting from as simplest as average of certain candle periods to the most complicated formula that consider a specific level of significant value.
MA’s are considered as a lagging indicator. Considering this, many people are competing to refine the basic formula by entering new parameters. Until now, there have been no fewer than 45 types of MAs with various variations.
Enough with all the background regarding the MA. Now the most important thing is, how to set the best MA so that we can get optimal profit.
The basic concept in setting up a Moving Average
Once again we must remember that MA is an indicator that recognizes ongoing trends. With this premise, we know that trends are very closely related to time. Trends in the past week can be very different from the current trend in the past month. Especially compared to the past six months, the last year, the last five years, even the last 10 years. It is possible that in the last one year the price of a commodity or currency pair is in a downtrend, in contrast to the condition of the past week where prices are continuing to move up.
Based on this, then in using a MA we must consider a minimum of three periods which are our references, namely short, medium and long periods. As a variation, maybe you can also use two short periods and one long period. Which is better than both? I would suggest the first one more. Why? Using two short periods may be good at determining your entry point, but you lose a period between short and long periods. You will lose a connecting bridge that illustrates the correlation between short-term movements with long-term trends. This is very dangerous for your trading, especially if you are a beginner trader.
So, whether you use a combination of daily-weekly-monthly or monthly-quarter-semester or even quarterly periods, I still recommend that you always use a combination of three short-medium-long MAs.
Recommended period numbers
The MA period which is usually recommended by default is 14. Beginner traders usually do not understand where these numbers are obtained. This is given as it is, and is usually used for granted. Some will add or reduce it, but how much is needed, nobody knows. Each changes it as they wish. Here I will explain how I determine the number.
I am a daily trader. You certainly know the intent of the daily trader I mean here. Yes, I make transactions with an average of no more than one day open and close. So, I use the daily trend period compared to the weekly trend with a monthly long-term trend reference.
As a daily trader, I used to use the 1H timeframe for my trading. Sometimes I jump to M15, but I don’t do it too often. Sometimes I also see H4 as a consideration, but I very rarely trade on this timeframe.
So, I will suggest period numbers for daily traders. Can these numbers be used by long-term traders or vice versa the scalper? It could be, of course with a little adjustment.
Basically I divide the trend period with the timeframe I use. This is the period number key that I use. For example, if I want to map the daily MA period on the 1H timeframe, I use number 24. This number is obtained from how many 1-hour candles are produced in 1 day. I use the same method if I want to describe the weekly trend in the 1H timeframe. The formula that I use is the number of candles in a day multiplied by 5 days (active trading days in a week) equivalent to 120. Next, to get an overview of monthly trends, the multiplier that I use is an active day of trading in one month equal to 480. (Note: the number of active trading days in one month varies between 20-22, so I am rounding to 20 days).
Thus, I have gotten an overview of trends in the short (daily), medium (weekly), and long (monthly) periods, namely 24, 120, and 480. It is easy right?
What about scalpers or swinger? You can adjust the period by considering the things in the Best MA Setting for Scalper and Best MA Settings for Swinger