Powerful Insights Into Moving Average and Its 5 Critical Drawbacks

Understanding the Moving Average and Its Drawbacks

There’s no debating the Moving Average’s worth in technical analysis. It’s always been among the most prominent and highly recommended trading tools.

However, the indicator has significant drawbacks, as discussed in this article. You’ll understand how it works with possible considerations when using it for the best results.

Table of Contents

1. Understanding the Moving Average

One way or another, almost every technical analyst once depended on the Moving Average (MA). It may have been a standalone tool or with other parameters in complex systems.

Regardless, the way it smoothens price fluctuations has inspired several applications.

Simple Moving Average on a TradingView chart
Simple Moving Average on a TradingView chart

The indicator (as shown above) is from a set of values’ average in a fixed subset size.

As more price data becomes available, it recalculates and repositions on the chart. Hence, the line never stops forming during active market hours.

There are many types of Moving Averages with varying properties, but below are some of the most famous among contemporary traders:

  • Simple Moving Average (SMA): True to its name, this is the most basic kind of MA, with every data point contributing equally to its formation.
  • Weighted Moving Average (WMA): The WMA prioritizes some data points (of your choice) more than others.
  • Exponential Moving Average (EMA): The Exponential MA is like the WMA, but it only gives more weight to the most recent data points.
  • Hull Moving Average (HMA): The HMA has been making waves recently, especially in building other indicators. It uses three different periods for calculations, unlike most others that use one.
  • Smoothed Moving Average (SMMA): SMMA works like the EMA but tends to be smoother with the same data points.
The Hull Moving Average in action
The Hull Moving Average in action

2. Significant Drawbacks of the Moving Average

Being one of the oldest trading companions, generations of technical analysts have recorded outstanding results from the MA. They impressively identify trends, reduce chart noise, and inspire strong support & resistance levels.

Then again, the indicator poses notable shortcomings only a few users discuss or even notice. Below are a few such:

2.1 Low Regard For Fundamental Changes

The Moving Average is a lag indicator, so every detail provided at any time is entirely from historical data in price charts.

It may seem insignificant when nailing impressive results from its forecasts, but the indicator may fail analysts when the tide quickly turns on an instrument fundamentally.

A company could change ownership, supply and demand may rise/fall exponentially, or new competitors may enter the market.

The MA won’t immediately respond to such fundamental factors until they leave footprints later in charts.

2.2 High Subjectivity

Unlike many technical indicators, there’s no “proper” method to use MAs.

Users having multiple perceptions of a problem
Users having multiple perceptions of a problem

Some traders find them sufficient to analyze trends, generate signals, and open positions, but others only use them to satisfy criteria in their trading strategy.

Several folks set the period for longer or shorter, and no one can conclusively “prove” that anyone uses it correctly or incorrectly.

2.3 Too Many Types

While the several kinds of Moving Averages seem a blessing for ambitious analysts, they promote analysis paralysis.

The Simple MA is the maiden type many traders have known and used for years. However, new ones keep emerging every other period. They vary by how each tends to prioritize the weight of price data used.

The EMA is among the many types of Moving Averages
The EMA is among the many types of Moving Averages

Hence, beginners have more to research when considering this indicator for analysis.

2.4 Downplay By Top Analysts

Some schools of thought argue that (especially) as a lag indicator, the MA has no say in predicting future moves. Everything that has happened is in the past, so using it for any forecast is already flawed.

That said, you can employ it only to analyze prices’ underlying conditions. It could guide your next move without directly influencing it.

2.5 Decreased Efficiency in Volatile Markets

During extreme volatility, shorter-period MAs give false trading signals as they try to reduce chart noise. Hence, while experienced investors avoid using them in whipsaw conditions, newbies put a lot on the line when they do.

High-impact social and geopolitical events can temporarily influence this, making your indicator ineffective for as long as it lasts.

3. Defying the Odds With an MA-Inspired Trading Tool

Experts may promote the MA for many reasons, including its simplicity and ability to provide quick insights. Regardless, its limitations and flaws, as discussed earlier, can discourage any potential enthusiast.

Fortunately, Indicator Vault’s Trend Focus for TradingView is an excellent alternative for reliable analyses and forecasts. It works like an MA but is significantly better in all facets.

Trend Focus at work in TradingView.

Below are a few benefits every user enjoys from it:

  • Much quicker understanding of the underlying trend
  • Faster, higher-probability entry and exit signals in any market
  • Ability to trade in any desired timeframe
  • Timely alerts from within and outside the trading platform to ensure you never miss the best opportunities

Try it here today! The instant results will amaze you.

4. Conclusion

The Moving Average may be one of the most embraced technical tools ever. It is relatively simple to set up and use in the charts.

However, it comes with setbacks, such as low regard for fundamental events and numerous options. Some analysts even believe no trader should consider it for forecasts, being a lagging indicator.

Therefore, Trend Focus for TradingView should be your go-to tool to shake the markets. It reduces the lags on traditional Moving Averages and provides more trading flexibility.

Please remember to share this article with friends and colleagues on social media for increased exposure to the pitfalls of the MA.

Also, the Comment Section is always open for any appeals, suggestions, and results.

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