You are (probably) using MAs wrong
Updated
When it comes to moving averages, people tend to forget what they are. A moving average is just as the name suggests - an average of the chosen number of candles that moves (once a new candle prints). I know it seems obvious to most, but why then, when it comes to lengths we seem to be so confused about it?
When choosing the length of a MA - what do you look for? "Magical" Fibonacci Numbers? Most common length 200, because you were told that's what everyone uses?
But let's thing about it for a second. What is an EMA200, for example? It's an exponentially weighted average of the past 200 candles. So why would it be so "important"?
MA200, if you're on a 15-minute timeframe represents two hundred 15-minute candles, or, in different words - an average price of the past 50 hours.
MA200 on a 5-minute timeframe represents two-hundred 5-minute candles, which equals to about 16 and a half hours. Is there anything special about the average price of the past 16.5 hours? Of course not.
The way moving averages should be looked at, in my humble opinion is by using them to look at an average price of the past periods that actually matter. Periods like Daily, Weekly, Monthly.
If you're a scalper who trades 1-minute charts, perhaps you want to know what the average price of the past 15 minutes, 1 hour and 4 hours is.
To do that you would divide 15 by 1, giving you MA length of 15 representing the average price of the past 15 minutes.
If you're a day trader, like me, who loves trading 5 and 15-minute timeframes, I want to know the average prices of the past hour, 4 hours and Daily. Weekly and Monthly averages also give me potential targets, or potential areas of interest. Hence the length of forementioned moving averages would be 12, 48, and 288 (on a 5-minute chart) and 4, 12, and 96 (on a 15-minute chart).
I recently created an Indicator that automatically calculates these lengths based on your chosen higher timeframes of interest and your current timeframe, so you don't need to calculate these lengths yourself.
However, you can very easily do the same by making a simple calculation. How many of my current timeframe candles are in a higher timeframe that I want to know.
You can use the same method in calculating length of other things, like a RSI, for instance. Perhaps you wondered, like I did, why the period 14 is used to calculate the RSI.
Fortunately we can adjust these periods and perhaps find an edge in the market.
Hope this short post clarifies some things.
I will be publishing the Timeframe Based Moving Averages script soon.
Cheers
When choosing the length of a MA - what do you look for? "Magical" Fibonacci Numbers? Most common length 200, because you were told that's what everyone uses?
But let's thing about it for a second. What is an EMA200, for example? It's an exponentially weighted average of the past 200 candles. So why would it be so "important"?
MA200, if you're on a 15-minute timeframe represents two hundred 15-minute candles, or, in different words - an average price of the past 50 hours.
MA200 on a 5-minute timeframe represents two-hundred 5-minute candles, which equals to about 16 and a half hours. Is there anything special about the average price of the past 16.5 hours? Of course not.
The way moving averages should be looked at, in my humble opinion is by using them to look at an average price of the past periods that actually matter. Periods like Daily, Weekly, Monthly.
If you're a scalper who trades 1-minute charts, perhaps you want to know what the average price of the past 15 minutes, 1 hour and 4 hours is.
To do that you would divide 15 by 1, giving you MA length of 15 representing the average price of the past 15 minutes.
If you're a day trader, like me, who loves trading 5 and 15-minute timeframes, I want to know the average prices of the past hour, 4 hours and Daily. Weekly and Monthly averages also give me potential targets, or potential areas of interest. Hence the length of forementioned moving averages would be 12, 48, and 288 (on a 5-minute chart) and 4, 12, and 96 (on a 15-minute chart).
I recently created an Indicator that automatically calculates these lengths based on your chosen higher timeframes of interest and your current timeframe, so you don't need to calculate these lengths yourself.
However, you can very easily do the same by making a simple calculation. How many of my current timeframe candles are in a higher timeframe that I want to know.
You can use the same method in calculating length of other things, like a RSI, for instance. Perhaps you wondered, like I did, why the period 14 is used to calculate the RSI.
Fortunately we can adjust these periods and perhaps find an edge in the market.
Hope this short post clarifies some things.
I will be publishing the Timeframe Based Moving Averages script soon.
Cheers
Note
The chart above shows 4 timeframe based moving averages.The white channel is showing SMAs using hourly highs and lows.
The orange is a moving average representative of a 4-hour timeframe.
Yellow one is a Daily average price and the green one - weekly.
There are 2 other indicators on the chart. The colorful boxes show the opening ranges of each of the trading sessions.
The last indicator plots opening gap (the difference between the closing price of the previous day and the opening price of today) and also the highest close of the current day, the highest low of the day, the lowest close of the day and the lowest high of the day.
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