MT4: What is most accurate indicator?

Trading can very quickly become this complex game of speculation, which is why it is so heavily reliant on the range of indicators available on MetaTrader 4 (MT4). But with so many indicators to choose from (30 built-in indicators, over 2 000 free custom indicators and 700 paid ones), how does one pick the most accurate?

The answer is; you can’t. This is because no single indicator can consistently predict market movements with 100% accuracy. Every indicator has its strengths and weaknesses, and market conditions can vary considerably.

But for the purposes of this blog, we’ll be exploring a standout indicator that is renowned for its flexibility and ease of use, the Moving Average (MA).

Understanding the Moving Average indicator

The Moving Average (MA) is a popular indicator used in technical analysis. It smooths out price data over a chosen period by calculating a continuously updated average price. The MA is considered a lagging indicator, because it is based on past price data.

The indicator smooths out price fluctuations, making it simpler to spot the general market direction, be this moving up, down, or sideways. It is determined by averaging a certain number of previous closing prices over a defined period, forming a line that helps you observe a market’s trend.

Types of Moving Averages

There are different types of MA’s, but two of the most popular are the Simple Moving Average (SMA) and Exponential Moving Average (EMA).

Simple Moving Average

As its name would imply, the SMA is the simplest type of moving average. Essentially, it calculates the average price over a specified period, giving equal weight to all data points.

For example, if you were charting stock prices over a 50-day period, you’d record the closing prices for each of the 50 days, add them together, and then divide the total by 50. This would give you the SMA for that period, with each day’s price contributing equally to the final average.

Exponential Moving Average

In contrast to the SMA, the EMA gives more emphasis to recent prices which makes it more responsive to current market conditions. For the EMA to be calculated, the SMA over a specific window must be calculated first.

The appeal of Moving Averages indicators

Trading can come off as very daunting for beginners, particularly for those opting for fast-paced strategies or volatile instruments, e.g. currency pairs. Prices can move in adverse directions within milliseconds, quickly leading to overwhelm, stress, and anxiety. The ability to make sense of the noise ultimately comes down to effective analysis.

The MA is considered a highly flexible tool, making it a convenient choice for those new to trading. It is customisable meaning it can be tailored to time frames that best align with your particular trading strategy, be it scalping or day trading, or even longer term approaches like swing or position trading.

Moving averages are also essential in technical analysis for smoothing out price fluctuations, making it easier to identify trends and confirm their direction. They often act as dynamic support or resistance levels, providing potential buy/sell opportunities, with the 200-day MA commonly used by institutional investors.

Crossovers, such as the Golden Cross or Death Cross, generate signals for trend reversals or continuations. MA’s also confirm breakouts, assist in momentum analysis, and are widely recognised due to their prevalence among traders.

Most common moving average periods

Traders use different periods to create moving averages to plot their charts. The most common are the 50-day, 100-day, and 200-day MAs, which are commonly used for detecting major long-term support and resistance levels, as well as overall price trends.  Short-term traders may make use of 12 or 26-day EMA.

One of the most popular MA’s used in the financial industry is the 200-period MA because it is a strong indicator of long-term trends, and when the price crosses this line, it often signals a significant shift in market sentiment.

Becoming a skilled trader for informed decision making

There are many ways to learn how to use moving averages in the most effective way.

Ongoing learning

For one, acquiring a trading related education is key to acquiring as much information as you can about MAs. Some of the ways to do this include consuming resources like blogs, podcasts, videos, webinars, seminars, among others.

Reputable brokers like IronFX offer access to high quality educational tools for traders of all levels via the broker’s Academy. Expert researchers and analysts offer valuable trading insights, tips, ideas, and strategies.

IronFX VIP Trading Room

Those choosing to become an IronFX VIP will also gain access to the broker’s VIP trading room through which you can trade and learn using IronFX’s interactive institutional grade market forecasts. Each forecast comes with a dedicated discussion panel so you can ask the analyst your questions. You can also request the broker’s award-winning analysts to take a look at any instrument for you for market forecasts.

Economic Calendar

IronFX’s Economic Calendar is another incredibly useful tool that covers financial events and economic indicators to help global investors remain updated and make informed trading decisions.

Demo trading account and indicator

Signing up for a demo trading account is probably one of the most practical ways to learn more about using technical indicators like MA’s. This is because the demo account gives you access to a trading platform, for e.g. the MetaTrader 4, on which you can practice using moving averages while implementing your trading strategy.

The demo account also offers a simulated trading environment that mimics real market conditions, in which you can enter and exit trades and assess outcomes. You are able to execute these trades using virtual funds so as not to put your own money at risk. Through consistent practice, you’ll eventually become a more informed trader and be able to make trading decisions with a higher potential for success.

Effective Risk Management with the Right Indicators

While the moving average is a relatively uncomplicated indicator to use, traders must still be cognisant of protecting their funds from losses as no indicator is perfect. Some of the ways to do this are ensuring you build and follow a trading plan that includes the rules by which you’ll trade, the level of risk you’re willing to incur, the trading strategy you’ll adopt, and your budget.

Working on keeping your trading psychology strong is another key component of safeguarding your money. Emotionally driven trading decisions ultimately lead to adverse financial outcomes. This is decisions that are led by feelings of fear, stress, anxiety, greed, etc. Ensure you conduct your technical analysis, and make decisions based on solid data rather than emotions.

Don’t forget to implement proper risk management techniques like stop loss orders to limit losses and take profit orders to secure profits. Also consider position sizing and portfolio diversification to further protect your money. Diversification facilitates the spreading of risk across instruments. Position sizing means being mindful about placing a large sum of money on a single trade, in the case that trade moves in an adverse direction and you end up losing all your money.

Trading with IronFX

Becoming an IronFX trader means gaining access to a high-quality, flexible trading experience, multiple asset classes, an extensive range of account types, and fast trade execution. Through this international broker with clients across the globe, you’ll also be able to enjoy seamless withdrawals and deposits, and market access via the MetaTrader 4 (MT4) trading platform, arguably one of the world’s most popular trading systems amongst global traders. The IronFX Academy also offers an abundant source of educational resources to boost one’s skills and acquire fundamental trading insights.

Disclaimer: This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.