ALL ABOUT MOVING

AVERAGES

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The moving average (MA) is a straightforward technical
analysis tool that smooths out price data by calculating an
average price that is constantly updated. The average is
calculated over a set length of time, such as 10 days, 20
minutes, 30 weeks, or any other time period selected by the
trader. There are benefits to employing a moving average in
your trading, as well as many types of moving averages to
choose from.

The moving average indicator is used by investors zand

traders both tailored according to their period of being in the
trade.

The moving average keeps on averaging a stock’s price and

creates a data point which gives a direction for the trader for
the trend.
 Why use moving averages?

Moving average is used to cut down the noise from the chart
and smoothen the average price of a stock. Technical analysts
worldwide use this indicator as a method of determining the
direction of the stock price.

So, how can a moving average indicate a trend? The facing of

the moving average depicts the direction of the stock.

A moving average moves from left to right and if the moving

average starts rising it means the stock will also rise, and vice-
versa. And if the moving average is behaving like a flat line,
that means the market is in a range, depicting a flat market.

Moving average indicating uptrend

 Moving average indicating downtrend

Moving average indicating ranging market

 Types of moving averages

There are several techniques to calculate a moving average. It

can be calculated simply or exponentially, two moving
averages are simple and exponential.

Simple Moving Avg.

A five-day simple moving average (SMA) calculates a new

average each day by adding the five most recent daily closing
prices and dividing them by five. The single flowing line is
created by connecting each average to the next.

Exponential Moving Avg.

The exponential moving average is another popular type of

moving average (EMA). The formula is more complicated
because the most recent prices are given greater weight.
When a 50-day SMA and a 50-day EMA are plotted on the
same chart, you'll note that the EMA reacts to price changes
faster than the SMA, owing to the increased weighting on
recent price data.

Both, simple and exponential moving averages work

significantly but there is no comparison that one works better
than other, the difference is just of the response according to
the price of the stock.
 Responsiveness of EMA and SMA to price

Here, on a bitcoin chart we have placed a 20 day simple

moving average and a 20 day exponential moving average.
Now, let us look how both react according to price movement.

The SMA is marked with blue color and the EMA is marked
with red color, as you can clearly observe that as the price
started to rising, the EMA responded quickly and keep moving
closer to the price but SMA started bit late and was away from
the price.
 Moving average lengths

Moving average can be of any length but mostly,

5,9,20,21,44,50,100 are used by traders. These lengths can
be applied to any chart frame be it one minute, 5 minute, daily
weekly, depending on trader’s horizon.

The period of moving averages can play a big role in trading,

can affect a trader’s set levels of trading if, periods changed.

A moving average with short period will react much quicker in

response to the price than a moving average with longer
period.
 Moving average Trading strategy

One of the most common moving average tactics is

crossovers. The first is a price crossover, which occurs when
the price passes above or below a moving average to indicate
a possible trend change.
 Moving average crossovers

Another option is to use two different moving averages on a

chart, one longer and one shorter. It's a buy signal when the
shorter-term MA crosses above the longer-term MA, indicating
that the trend is turning upward. this is knows as a golden
cross. Meanwhile, a sell signal is generated when the shorter-
term MA crosses below the longer-term MA, indicating that the
trend is turning downward. this is called a deathcross.

Let’s see an example of a golden crossover :

Blue MA crossing red MA from below indicates that
uptrend has started and it’s a buy signal for traders.
 blue MA crossing red MA from above indicates that
downtrend has started and it’s a sell signal for traders.

As trader, you must take the reference of price action as well,

completely relying on the moving averages is not going to
work in your favor.

Disadvantages of moving averages

You see, moving averages are always calculated on historical

data,so the information you get can be random sometimes
because moving averages are not predictive in nature.
Sometimes, You might get delayed signals which are very
inappropriate for traders.
 Wrap up

A moving average smooths out price data and creates a single

flowing line. This makes it easier to see the trend. Exponential
moving averages respond to price changes faster than simple
moving averages. This may be beneficial in some cases, but it
may also result in false signals in others. Moving averages
with a shorter look back period (for example, 20 days) will also
respond to price changes faster than averages with a longer
look back period (200 days).

Moving average crossovers are a popular entry and exit

strategy. MAs can also highlight potential areas of support or
resistance. While this appears to be predictive, moving
averages are always based on historical data and simply
display the average price over a given time period.