Moving average is the most used forex indicators mt4 in the world that provides an overall sentiment of the market behavior. It represents the average price of a currency pair in the last number of candles. Therefore, in this mt4 indicator, the number of candles is variable, and the value of moving average changes with the change in the number of candles.
As central banks and financial institutes drive the forex market, a trader needs to understand the institutional traders’ sentiment. Financial institutes and the Central Bank can make the price movement of a currency pair. Therefore as a trader, you should know how they control the price by measuring the movement with an appropriate moving average. If the price is trading below the moving average, it represents that sellers are controlling the price. On the other hand, if the price is trading above the moving average, it represents that buyers are controlling the price.
There are many moving averages like Simple Moving Average, Exponential Moving Average, Smoothed Moving Average, and Linear Weighted Moving Average.
However, the simple moving average (SMA) and the exponential moving average (EMA) are mostly used. The formula of moving average is simple like below:
Moving Average= Average price of N number of Candles/ Number of Candles
It is very easy to plot the moving average in the chart as it is free in most of the trading platforms. In the MT4 trading platform, it is available on the Trend section of indicators. When you click on the moving average, a box will appear to set the value of the moving average. Generally, there are four types of moving average available on the MT4 platform.
Among the various types of moving averages, the Simple Moving Average is used to identify the market’s macro view. For example, if you plot 200 SMA on the daily chart, you will see a line indicating the average price of the last 200 days. Therefore, if the price is trading below the 200 SMA, it indicates that sellers are dominating the price for the last 200 trading days. Overall, Simple Moving Average provides a reliable market sentiment in higher values like 100 SMA, 200 SMA, etc.
On the other hand, the Exponential Moving Average (EMA) is another mt4 indicator that follows a complex calculator than the SMA that focuses on the most recent prices. Therefore, it indicates a good trading signal in lower values. For example, we can find the market sentiment from the SMA and use the EMA to identify the market entry. If the price is trading below the 200 SMA and gets rejected from the 20 EMA on the daily chart, it would indicate that the bearish sentiment will stay longer.
Besides the individual uses of moving averages, you can use this forex indicator with price action tools. In the price action, 20 EMA works as a good dynamic support and resistance level. Any bullish and bearish rejection from 20 EMA indicates trading opportunity based on appropriate candlestick formation.