How can you choose the best moving average for forecasting? (2024)

Moving average is a trend indicator that helps to determine the trend direction, facilitates entry and exit points via two or more moving averages crossing.Moving average is a great tool in the hand of a technical analyst, as much as it is efficient it is not a holy grail to profitable trading.

Selecting the best moving average for forecasting involves considering the time sensitivity of your analysis:Simple Moving Average (SMA): Ideal for capturing the overall trend by evenly weighing all data points over a specified period. It's less responsive to recent changes, making it suitable for smoothing out long-term trends and reducing noise.Exponential Moving Average (EMA): Provides more weight to recent data, making it more responsive to short-term changes. This is advantageous when you want your forecast to adapt quickly to the most recent information, capturing emerging trends or shifts in the data.

A moving average helps by finding average values from different parts of the data to show how things change over time, making it easier to see the overall trend.Just imagine you have a bunch of numbers that changes a lot.A moving average helps by looking at groups of these numbers to see how they're changing over time.It smooths out the bumpy parts, making it easier to see the general direction or trend.

For me, while trading sometimes we have to check multiple instruments at different intervals like Dollar, gold, dominance, banks, etc. So, moving averages can indicate simply the trend or a future estimation of the price without working a lot in charts. I prefer exponential moving averages (EMA) because it gives more preference to recent prices. I also prefer using moving averages to identify the retracements, its simple and effective.

A moving average removes the noise of volatility and allows the creator of the moving average to see where price “should” find support or resistance. Note the most common misuse of moving averages is utilizing the pre-programmed numbers for all charts. 20-50-200 may not make sense in all timeframes except, perhaps the daily.

Le choix du nombre de périodes lors de l'utilisation des moyennes mobiles dépend tout simplement de votre stratégie. Plus elle est long terme, plus vous allez privilégier un nombre de périodes élevé.

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To determine what length or periods to use for Moving averages, a simple answer is your trading style. A shorter trend line might help you with scalping but it won't be very helpful for holding your trades in long term. Similarly, a shorter time frame might be good for trailing your stoplosses. While, a longer moving average might be good to consider for long term price moments with reliability, for example, price above 50 and 200 EMA's and 50 EMA crosses 200 EMA upwards it generates a long signal. So you may wait for a price retracement to crossover level to take a long trade this is called a golden cross and it is a common strategy. So, choosing the length or period simply by understanding your trading style.

I have been trading in markets for approximately 3 years and have never used any average except for EMA and ARIMA (but mostly EMA as ARIMA is unreliable for all assets.) I chose EMA over anything because it prefers the latest prices which makes it more focused on the latest trends in the markets.But I combine 2 or 3 EMA's it helps me identify and differentiate the short term changes in the prices.

I utilize simple moving averages because that is what the majority of people utilize. Most if what makes technicals work is popularity within the majority.

Some simple ways to use a moving average are:- To use it as stop-loss, trailing stop-loss, take profitsas it is generally near the area of liquidity. (mostly it happens but its not reliable) - Price crossing upwards or downwards might suggest a trend shift or trend strength- Moving average crossover is a common strategy- I use it to identify the retracementsThese are just the general ideas but my experience in trading suggests that trading is about finding your comfort in trading and innovating it to increase your profits. Sometimes it means combining multiple things.

When it comes to using MA, do note it is not telling us where price is going to be but when price is at this moment. Indicators are not prediction and especially lagging indicators like MA.

You should not optimize moving averages. Once you find what works consistently in a given timeframe, that becomes your constant in the equation. Price behavior over time becomes the variable to content with. If you begin to optimize you run the risk of curve fitting. Attempting to justify the changes if the variable as normal. There are of course exceptions to this rule such as adjusting for parabolic moves in paradigm changing catalysts. That would actually offer tighter risk constraints, which has value. Example, AIG price exits in 2001 verses 2009.

To optimize a moving average it is advisable to use moving average with other indicators, so that it can give you more conformation about the trend. You can also back test your moving average with different time frames to analyze the performance.

Moving averages count on mean reversion - a better method is to use range average mean reversion. Calculated on a Bloomber terminal it will take the average closing price of an asset over whatever period you choose and snap standard deviation bands around the average; above and below. They tend to be good long-term support and resistance lines. The function is RAVG

Il faut garder à l'esprit que plus on utilise une moyenne mobile long terme, plus elle constitue un support/résistance solide. De plus, la variation de celle-ci est plus sensible au fur et à mesure que l'on réduit le nombre de périodes.

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Change your moving averages for different time frames. For example, if you are studying a 60 minute chart, perhaps a 6.5 moving average makes more sense as equity markets trade 9:30 to 4pm, or 6.5 hrs, in the regular session.