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Some charting packages also have a WMA option. This stands for “Weighted
Moving Average”. As explained in the previous paragraph discussing EMA,
the WMA places more emphasis on the more recent data but the way it is
calculated is different. Feel free to experiment with it if you want, but you’ll
find that all you’ll be working with are just the SMA and EMA lines.
How are these lines used by traders? There are two common ways (an
advanced method is exposed in the next section). Method 1 is that traders pay
attention to when the market price crosses over a certain period MA (usually
just one line on the chart). Method 2 is that traders pay attention to when a
shorter period MA crosses a larger period MA (usually two lines on the chart).
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The chart above shows EUR/USD daily candle view. On this chart I’ve put a
50 period SMA (the yellow line) and the 200 SMA (the green line). This is to
illustrate “method 1”. Normally a trader would just have one MA line (either
simple or exponential), but I’ve put two lines on this chart to contrast different
periods. Actually, what I just said is not completely true. Traders often do
have multiple MA lines for this method simply to watch when the market
penetrates through any of those lines.
With “method 1”, traders plot the MA lines on daily charts (usually a SMA) to
watch when the market crosses the line. Common daily periods observed by
many traders include 50, 100, and 200. Why these numbers? Well some
people may give you some nice sounding rational behind these numbers but
truthfully they are just nice round arbitrary assignments; you could use weird
numbers like 47, 108, and 222 about as effectively. Ok, I’ve heard arguments
that 50 and 200 statistically have performed with excellent results to act as
significant resistance/support levels, and to some extent would agree from
what I’ve observed though I didn’t conduct any statistical analysis myself.
A lot of trader’s resource websites make mention of when the market crosses
these significant MA lines. Many traders consider penetration of these MA
lines to be a significant event. Why? Well just look at those lines on the chart
above. Notice that when market touches/crosses the line that soon after the
market races off for quite some time (trending) before it eventually reconnects
with that same MA line.
There are many traders that ONLY trade based upon when the market
connects with the MA line. This is such a simple indicator, yet it is
sooooooooo very powerful, and if you were to only trade based upon this then
you would do quite well for yourself.
Earlier on I mentioned that there was another method,
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