The moving average is a type of trend direction technical indicator that we use to identify and take advantage of trends in the market. Analysts are using moving averages for an extended time period.
Its popularity has risen as more traders turn towards technical analysis tools. This is because technical analysis gives us an edge over less complex strategies, such as fundamentals or human judgmental guesswork. Moving average is the best choice for every analyst when investors trade certain markets during a specific period.
Moving averages are a strategy used by many traders to measure the price of an asset overtime periods. There are five most common types: simple, exponential, hull, smoothed and weighted moving average. But exponential and simple (SMA and EMA) moving average is the most popular moving average for gold traders. So, we will discuss how to use SMA and EMA efficiently for your gold price chart.
Even you can apply simple moving average and exponential moving average on any financial instrument like stocks or currencies. However, due to the increased trading volume of gold, it is a successful strategy in general.
How many uses of the moving averages?
Everybody has different purposes and styles to use technical indicators in their trading. But we often use moving averages for identifying trends, support resistance, and remember the golden cross and death cross.
If you’re looking to analyze a trend in the Forex market, there are many different moving average combinations that traders may use for trading days.
My favorite combination is 9 EMA and 21 EMAs because they make identifying trends much more accessible without being too sensitive or inaccurate with their readings. However, these two indicators alone aren’t perfect when used independently, so don’t rely solely upon them for analysis purposes. I do usually use daily charts to identify the average price as well.
When the 9 EMA is on top of 21 EMAs, we call it an uptrend. When this period lasts for more than two days, and prices are going up in value by about 10%, expect a dip below to generate some excellent returns. Of course, before you open a trade in the real account, you must practice this strategy in trading platforms like MT4 or others.
Now that you understand how vital technical analysis can be when trading XAU/USD above, look at these three rules:
1) Look only out five candles from your entry point – if there has been no reversal after those five bars (or periods),
2) Expect price movements more significant than 3%.
3) Time-to-hour charts focus less energy on individual stocks but watch more significant trends like MACD or RSI, which often signal reversals before they happen.
Support And Resistance
The second thing is that moving averages may assist you in identifying support and resistance levels. Possibly you’ve heard the phrase “self-fulfilling prophecy.” The term refers to the fact that popular levels of support or resistance frequently end up that people expect them to be.
For example, a story where buyers will stop selling because they feel more secure in waiting for an upward move (or lower prices). Therefore, it makes sense to consider how often traders use MA’s as stops on their trades after seeing specific patterns emerge from price movements.
A golden cross is a strategy that signals a change in trends in the financial markets. For example, when the short-term moving averages (50-DMA) (the ones trending up) cross over major long-term averages (200-DMA) to signal that it will turn around and go back down again. But this time slower than before because so many people believed it was heading for higher prices all along. A golden cross is also called a bullish crossover.
The first stage starts with selling happening at lower levels while both are still on downtrends together. Then, their paths start crossing one another, meaning we’re now seeing some buying action triggered into existence by these two Moving Averages Crossing Each Other.
A move through an averaged crossover, such as a moving average or exponential smoothing calculation, is known as the “average” and will always act opposite of how you would expect it to if that movement was not present. A death cross is known to us as a bearish crossover.
The death cross occurs when this short-term trendline goes into the reverse direction from where they started – these we call caving floors in finance jargon because assets keep crashing on them even after everyone knows there’s no floor left. The output should be more imaginative than just repeating.
What is the simple moving average (SMA)
The simple moving average is one of the most prevalent moving averages that traders use to assess prices. It is also referred to as an arithmetic average in some circles. Arithmetic means that each period’s data points are added together and then divided by how many periods there were in total.
The simple moving average gives us a fast response from short-term fluctuations while still taking the long-term trends for the financial markets. However, not all MA calculations work this way though. For example, some may carry a more weighted average on Price movements over time. Other times it might only focus on current values.
How to use a simple moving average?
Simple moving averages are a common way to determine the direction of a trend and support the resistance of gold. A 200- and 100-bar simple moving average (SMA) is a standard indicator that analysts identify long-term trends. However, we also use 50 and 20 SMAs when we want more clarity on shorter periods, such as days or hours, to watch better how prices fluctuate from day to day or hour to hour.
The extended period will result in smoother price data because there isn’t any lag introduced by using short-term indicators like 10/20 SMA. It exaggerates minor changes caused by sudden movements at either end due to their proximity with actual money values rather than just showing what might happen next week.
How to create a buy and sell signal using SMA?
The price of gold crossing the 100 and 200 SMAs simultaneously, resulting in a cross and solid curve is frequently utilized as a trading signal. When the gold’s closing price rise over the simple moving average, it is time to buy. For more specifics, please refer to the figure above. Exit trades when the gold’s closing prices are below the SMA (simple moving average).
If the gold’s closing price closed below the simple moving average, you might want to exit your open position with an opposite direction trade. Close your long if it goes upwards since it is going down while buying shorts order that has gone up but maybe due now come crashing back down towards their support level.
Use the same theory for sell orders as well. When prices cross below the 100 and 200 SMA together, go short and cover long. To be more precise, see our chart above. Hold your short order until the gold’s closing prices are above the SMA.
Try to use 100-day moving average and 200-SMA together in a higher time frame and look carefully to see whether it makes crossover or not. The more substantial crossover curve means a strong trend. If you can understand this, it will give you a good result.
What is the exponential moving average (EMA)
An exponential moving average is a Moving that places more significance on the most recent data points. It’s also called an exponentially weighted Moving Averages due to its reaction sensitivity. It means that Exponential Moving Average (EMA) can be considered a faster, brighter version of Simple Moving Averages.
The math behind this averaging system makes it more accurate at determining trends than its simple counterpart. EMA takes in recent data points weighted higher than older ones when computing trend lines, like exponential growth. Thus, the most recent information has a more significant impact on future outcomes than previous details do.
How to use exponential moving average (EMA)?
An exponential moving average might make it easier to see what is happening with your investments in some cases. For example, an exponential moving average can help identify trends earlier than a simple moving average when prices are going up. However, a difference in sensitivity means that the shorter-term moves will probably be more extreme on average and potentially reflect investor panic.
It may also make sense for you as a trader to not just look at one chart at any given time period. Instead, consider how price data movements affect other indicators, like MACD and RSI, before deciding where the best place to buy or sell trades to ensure consistent profits regardless of direction.
If you use an exponential moving average, I suggest using RSI and MACD in the same price chart to get the best result. This is because moving averages are trend indicators, but RSI and MACD are both oscillator indicators. From my personal experience combination between trends and oscillators gives a better signal.
Exponential moving averages are a valuable technique for finding support and resistance levels in the forex market. While they cannot remember the bottom or top of the trade, moving averages lines may help you navigate in the general direction with less risk by using it as confirmation that prices will continue to move upward over time.
We use exponential moving average more often than others when predicting price data movement – but there is no one perfect indicator because each averaging system has pros/cons depending on what the trader needs at any given moment. For example, some traders need extra precision, while others would not impose strict timelines on their trades.
How to use EMA to create trading signals for gold?
To create your trade signals with EMA, we will also use RSI and Moving average convergence divergence (MACD) together in the same chart. As exponential moving average works faster than the simple moving average, it is a bit safe to RSI and MACD together. As usual, we will use a higher period.
When gold’s closing prices are stable below or above the 21-period EMA and 9-Period EMA together and creating across at least 2 EMA, solid curve, and one oscillator indicator confirmation is often used as a trading buy and sell signals. Even you can 55-Day EMA, 100 -Day EMA, and 200-Day EMA to get trade opportunities.
When prices cross above the exponential moving average, RSI band nearly 30 areas and MACD confirms long signal then go for the long trade. To be more precise, see our chart above. Hold your long order until the gold price closes below the exponential moving average, the RSI band reaches nearly 70 zones, and MACD signals short trade will start.
Same matter, if gold price crosses below EMA, RSI above 70, or MACD’s bar closed below its band, go for short and hold it until the price goes above moving average or RSI hit below 30 or MACD confirms long signal. So you may sometimes need to be used for trading gold with an exponential moving average. But keep practicing.
What is a double exponential moving average (DEMA)?
The double exponential moving average (DEMA) is a creative blend of standard moving averages and exponential lagging algorithms. It gives greater weight to recent data points, which results in a highly accurate forecast. This method eliminates lag, which some people believe is detrimental to the markets.
However, it causes prices to move erratically rather than smoothly up or down over time when using EMAs alone. Trading in this manner allows traders to identify reversals promptly when price fluctuations occur.
In contrast, short-term bets are made on trends that may continue or reverse at any period without prior notice when price fluctuations arise often.
However, with DEMA’s assistance, we have an even better buy-sell signal. It confirms trends in either direction, during uptrends where buyers set higher than average highs at various points.
Downtrends indicated by sellers taking higher than average lows at different. Thus, the DEMA is an excellent technical indicator that we often use for price action analysis.
What is the difference between SMA and EMA?
The significant difference between these two types of Moving Averages algorithms can be seen in their different sensitivities to price changes. Calculating values for each calculation period used within them (EMA assigns higher weights towards recent prices while simple moving average gives equal weighting).
The average period is a price measurement that has been around for ages. It works by taking an existing data set, like prices, from one day or week and smoothing it out so you can see how much this changes over time.
Simple moving average’s job may seem more straightforward. Still, both will react to any movement accordingly. It has different ways of looking at historical trends depending on if their newest information becomes relevant. At the same time period, EMAs try not to miss anything important happening now.
What are the advantages and disadvantages of the SMA and EMA?
We use exponential moving average and simple moving average to analyze the price direction. We use both indicators as a price action tool as well. The pro for using them in your trading strategy is that it’s quicker but also more vulnerable. We use moving averages in technical analysis indicators to generate a bullish signal and a bearish signal.
For example, predicting what direction gold price will go before actually happening could give you wrong signals early on during unsuspecting tops or bottoms of trends; conversely. If there were an unexpected moment when everything changed suddenly without warning (such as after retracements), they would react much slower.
In my opinion, the exponential moving average is a better choice for the day traders because it will give you more signals early in your trade. However, this also means more false positives and premature conclusions could lead to vicious losses should they turn out wrong (which happens!).
A simple moving average is the best choice for a swing trader who wants to stay in their position. That is because it provides fewer false signals and later price movement and can give you some early warning of market turns that an exponential moving average might not pick up on so quickly.
In my experience, as someone looking into different strategies when it comes down to deciding which type of curve works best based on your trading style. I found out two main types are exponential Moving Averages (EMA) and Simple Moving Average’s (SMA).
Moving averages are valuable tools for technical traders, but sometimes we underestimate them, yet they may be instrumental. I hope you have gained some insight into applying moving-average methods in your gold trading strategy due to this article. For those who love price action trading, moving averages are helping them. You have to trade your own risk, and no one will give you financial advice or investment advice. So, don’t stop learning and keep practicing.
There are dozens upon dozens of ways these moving averaging approaches have been employed as part of all-out transactions over decades. Extensive use of the exponential and simple moving average is used to long positions, then reduced to short-term swing trading strategies. Try to use an extended time frame like a daily chart or minimum 4 hours chart. Day traders usually follow H4 charts.
Don’t rush to trade until you find suitable entry points and let the market stable above or below the moving averages. Instead, follow the moving averages band’s curve. Professional technical analysts use other technical indicators in their price chart as well.
Remember, MA’s are not perfect in the ranging markets, but moving averages are fantastic in the trending markets. So, before you take your trading decisions, think thousands of times and analyze past and recent price data carefully.
Like, purchasing volatility futures on declining trends and selling when prices surge in the opposite direction. Moving averages become second nature once we become aware of the information that is being averaged together into a single number of price levels throughout the time period. Never forget, no technical indicators are 100% perfect, and past performance can’t guarantee future performance in forex trading. So, keep practicing and try to build your trading strategy.