Moving averages: Definition, and how they are calculated

Moving averages: Definition, and how they are calculated

Definition

the moving average.(MA) is one of the most commonly used technical indicators. If you’ve spent even a little time looking at price charts. As a result, you will have noticed that most often the price of an instrument will move up and down in fast-moving markets. You may find that the price may be moving up only to break down moments later before surging up again increasing the potential for false signals.

filter the noise

the moving average.(MA) may help filter the noise from random price movements and smooth it out to see the average value. Moving average.(MA)s are used to identify trends and confirm reversals. When the price is above the moving average/(MA) line we find the instrument to be in an uptrend. In the opposite direction if the price is below the moving average..(MA) line we consider it to be in a downtrend. The breaking of the moving average.(MA) line usually implies a trend reversal

support and resistance

Secondly moving average/(MA)s are also used to identify areas of support and resistance. Many traders will consider the moving average.(MA) line as a support and resistance level indicator and based trades on it. So traders will check to see whether the price is going towards the moving average.(MA) and see whether it will bounce back from it or break it as with regular support a resistance level . Often times the price of an instrument will find support at the moving average.(MA) line when the trend is up and will find resistance at the moving average.(MA) line when the trend is down.

 Most importantly moving average/(MA)s will tell you whether an instrument is trending up-down. Or if it’s ranging. Further It can tell you if a trend is still in motion and whether it is. reversing or losing momentum.

Have in mind that a moving average.(MA) is based on past prices. And is known as a lagging indicator.Therefore, it will not warn you in advance but it will confirm when a trend change has taken place at the most basic level when the price crosses up and over the moving average.(MA) traders take this as a signal to buy. One it crosses down under the moving average.(MA) line they consider it a signal to sell .

Three main types :

the simple moving average :

We will discuss the simple moving average/(MA) or SMA first and show you how it’s calculated. So that you can adjust it according to the given market circumstance. To clarify. f you wanted to plot a 10-day simple moving average. (MA) you would add the closing prices of the last 10 days and divide by 10 calculation gives equal weight to each day. It’s called a moving average.(MA) as the oldest price is dropped each time a new period becomes available. Consequently, in this way insuring that the average is based only on the last X number of periods. In our example for the last ten days.

 have in mind that the longer the simple moving average.(MA) period the more it lags and the slower it is to react to the most recent price movement. And this brings us to its downside as equal weight is given to all periods considered in the calculation of the simple moving average.(MA) is slower to respond to rapid price changes that might prove to be important.

weighted and exponential moving average :

So how can you counter this with another type of moving average.(MA) either a weighted or an exponential moving average.(MA).The weighted and exponential moving average are calculated differently from one another. But both types give more weight to recent periods. So as a result weighted and exponential moving average.(MA)s respond faster to price action by distributing more weight to recent periods and less to older periods they reflect a quicker shift in sentiment which can be due to changes in supply and demand or important news events that impact the traded instrument to illustrate.

 what we mean if you were to plot an exponential moving average/(MA) and a simple moving average.(MA) on a chart, you will see that the exponential moving average/(MA) is closer to the current price than the simple moving average/(MA) apart from the type of moving average.(MA). You also have to decide on the time period this will largely depend on the type of trend you are analyzing.

 Finally, here are some guidelines for commonly used time periods 10 to 20 for short-term trends 50 for midterm and 200 for long-term trends are typically used when and how should you use moving average.(MA)s deciding which moving average.(MA) to use and the time period will depend largely on your objective use exponential moving average.(MA)s for shorter timeframes or if you’re analyzing a fast-moving market as you’d have more emphasis on the latest prices use simple moving average.(MA)s if you’re planning on holding a position for a longer period of time as the exponential moving average.(MA) might be too sensitive and give false signals you should also use simple moving average.(MA)s if you just like to filter out the noise and random price fluctuations to determine the overall market direction.