Trader Tip: Smoothed Moving Average Often when trading we use a simple moving average (SMA) as Filters to judge trade direction within our Trade Plans. However often we find that this indicator can be noisy, flipping positive and negative, giving us potential false indications with erratic price movements. One could move to a higher time period on this SMA indicator to smooth out the indicator line, but then the indicator has a longer-term view and will be largely too lagging, getting us into a trade too late or staying in a trade too long. In this article we will discuss a way to resolve this by using a different MT4 moving average indicator, the Wilder’s Moving Average indicator.
The Wilders smoothing moving average was developed buy J. Welles Wilder, Jr. and first presented in his book “New Concepts in Technical Trading Systems” (June 1978). He used it as a component in several of his other indicators including the RSI which is one of the most popular technical indicators of all time. The formula for the Wilders indicators is: EMA% = 2/(n + 1) where n is the number of days. Instead of doing the math, let’s look at example of how this looks when compared to a simple moving average.
In the graphic (click thumbnail to view), we can see that the same time period moving average yields a more smoother view to give a better price direction in your trading analysis. Though it does make the moving average slightly more lagging, it will be less lagging than a higher time period simple moving average, while smoothing out the noise in the simple moving average indicator. The Wilders indicator has two input variables. Period (default is 20), which is the moving average periods relative to the chart symbol and time series and Price, which indicates what part of the time series bar will be used in the Wilders calculation. They are as follows:
- 0 – Close (default)
- 1 – Open
- 2 – High
- 3 – Low
- 4 – Median
- 5 – Typical
- 6 – Weighted
Click here to download the source of the Wilders MT4 Indicator.
The suggestion is to use the Wilders moving average instead of the regular simple moving average to filter our “noise”, especially on lower time period moving averages. Keep in mind that all these “price pattern” indicators are lagging and needs to be used as Filters in a Trade Plan, rather as a Trigger. Click here, or watch below a video presentation of this Trader Tip.
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