Corrected Average Indicator for Metatrader 5

December 22, 2014

495

A corrected Average Indicator is a sophisticated variation of the traditional moving average. Unlike its simpler counterpart, the Corrected Average takes into account market volatility, providing a more accurate representation of price trends. It filters out noise and false signals, making it a valuable addition to any trader’s toolkit.

Moving Averages Overview

Before diving into the Corrected Average, let’s revisit the basics of moving averages (MAs). MAs smooth out price data by calculating an average over a specified period. They help identify trends and potential reversal points.

Types Of Moving Averages

Simple Moving Average (SMA): The straightforward average of closing prices over a defined period.
Exponential Moving Average (EMA): Gives more weight to recent prices, making it responsive to recent market movements.
Corrected Average: Our focus today! It combines the best of both SMA and EMA.

Origins And Concept

The Corrected Average was developed to address the limitations of traditional MAs. It aims to find the optimal balance between responsiveness and smoothness. By incorporating volatility, it adapts swiftly to market changes.

Role Of Volatility In Corrected Averages

Volatility reflects market uncertainty. The Corrected Average leverages this information to fine-tune its calculations. When volatility spikes, the threshold tightens, reducing noise.

Threshold Calculation

The threshold dynamically adapts to recent price fluctuations. Traders can customize this parameter to match their risk tolerance and trading style.

Avoiding Whipsaws

Whipsaws—rapid price reversals—can wreak havoc on trading strategies. The Corrected Average minimizes whipsaws by emphasizing significant price movements.

Signal Confirmation

When the Corrected Average crosses above or below the price, it signals potential trend changes. Confirm these signals with other technical tools for robust decision-making.

Trend Identification

Use Corrected Averages to identify primary trends. A rising Corrected Average suggests an uptrend, while a falling one indicates a downtrend.

Support And Resistance Levels

Combine Corrected Averages with horizontal support and resistance levels. Price reactions near these levels provide valuable insights.

Divergence Analysis

Look for divergences between the price and the Corrected Average. Bullish or bearish divergences can signal trend reversals.

Historical Performance Assessment

Backtest Corrected Averages on historical data. Assess its accuracy, drawdowns, and risk-adjusted returns.

Parameter Tuning

Fine-tune the Corrected Average’s parameters. Optimize for specific currency pairs or timeframes.

How to Trade with Corrected Average Indicator

Buy Entry

Wait for the Corrected Average (CA) line to cross above the price chart.
Confirm this bullish signal by checking if the CA is above its volatility-dependent threshold.
First, identify a bullish signal on a higher timeframe (e.g., H1).
Then, wait for a similar bullish signal on a lower timeframe (e.g., M5).
Enter long (buy) when the following conditions are met:
CA crosses above the price.
The volatility threshold supports the trend.
Consider additional confirmation from other technical indicators (e.g., MACD, RSI).
Set your stop-loss below the recent swing low or a significant support level.
Adjust the stop-loss based on market conditions and your risk tolerance.
Let a portion of the position run with a trailing stop to capture larger gains.

Sell Entry

Wait for the CA line to cross below the price chart.
Confirm this bearish signal by checking if the CA is below its volatility-dependent threshold.
First, identify a bearish signal on a higher timeframe (e.g., H1).
Then, wait for a similar bearish signal on a lower timeframe (e.g., M5).
Enter short (sell) when the following conditions are met:
CA crosses below the price.
The volatility threshold supports the downtrend.
Consider additional confirmation from other technical indicators.
Set your stop-loss above the recent swing high or a significant resistance level.
Adjust the stop-loss based on market conditions and your risk tolerance.
Use a trailing stop for the remaining positions.

Corrected Average Indicator Settings

Conclusion

The corrected Average Indicator for MetaTrader 5 is a powerful tool that bridges the gap between traditional moving averages and volatility-based adjustments. By incorporating market dynamics, it provides traders with more accurate signals, reducing false alarms and enhancing precision. Whether you’re a seasoned trader or a novice, consider integrating this indicator into your trading strategy.