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What is the Moving Average (MA) indicator?
A Moving average (MA) is a technical indicator used to calculate the average value of an asset over a given period of time. The moving average indicator is a lagging indicator based on past values, such as the highest price, the lowest price, the opening price, the closing price, and even the volume, which is used to filter the various statements caused by random price fluctuations.
There are various types of moving average indicators, and the main difference between them is the weighting of different historical data points. For example, an exponential moving average (EMA) places more emphasis on the impact of recent data, while a simple moving average (SMA) assigns the same weight to all prices.
The time range of the moving average indicator can be set on demand, and you can select minute, hour, daily, weekly, monthly, or even yearly data to calculate. Of course, traders can also autonomously set longer or shorter time ranges to obtain averages.
The trader chooses the time frame based on the specific trend desired. It is worth noting that the higher the number of time periods, the smoother the average.
Simple moving average (SMA)
A simple moving average (SMA) is an arithmetic moving average that is averaged by adding the closing prices over a specified period of time and then dividing the sum by the number of periods.
The average shows a simple upward or downward trend, giving the trader a rough overall impression of the market. The larger the time period, the less volatile the simple moving average will be.
Some traders are skeptical of simple moving averages (MA) because MA treats all closing prices the same, while they believe that newer ones have more weight and importance to the data.
Exponential moving average (EMA)
An exponential moving average (EMA) is a weighted moving average in which the newer data points have a higher weight. As a result, EMA is more accurate in its responsiveness to recent price changes than a simple moving average, which helps traders grasp the best time to open or close a position.
EMA helps to catch sudden price activity, but is not as accurate as SMA in charting long-term trends, nor is it as useful in determining support or resistance levels. For example, when a stock falls briefly, EMA may alert the trader to exit the trade early.
Who invented the moving average?
The moving average indicator is one of the oldest tools in the field of technical analysis, originally published in 1901 in the work of mathematician R. H. Hooker, known as the "instantaneous average". The "moving average" was coined by Yule in 1909 when describing the process of Hooker.
What is the role of the moving average?
As far as technical analysis is concerned, moving averages are simple and effective, and beginners can also easily make a trading plan based on a moving average strategy. Moving averages have a wide range of applicability when trading the market, making them play an important role in market analysis.
Moving averages can be used to detect price changes, detect market trends, and generate trading signals, as well as to determine dynamic support and resistance levels. These price points are different from traditional support and resistance levels because they are constantly moving and changing.
Technical Analysis: How to Trade with the Moving Average Indicator
There are a few things to consider when considering how to use moving averages in trading. Moving averages provide traders with three different types of information, which form the basis of a moving average trading strategy.
- Trading Signals
Traders can get buy and sell signals for any asset through the moving average (MA). These signals can be done simply by comparing the relationship between the moving average and the current market. If the current market price exceeds the rising moving average, it is a buy signal, while if the price is below the moving average, it is a sell signal.
- Trend judgment
Moving averages (MA) can be used to detect market trends and price changes. In other words, it can be used to help traders determine market trends. Traders can analyze market movements by simply drawing an SMA and looking for differences between prices.
If the price trend stays above SMA, it indicates that the price is in a general upward trend. Conversely, if the price moves below average, it indicates a general downward trend.
Senior traders will combine different moving averages to get more accurate buy and sell signals, a technique known as cross positioning.
Combining different kinds of moving averages can provide traders with clearer trading signals. The Cross of the short-term moving average and the downward price movement represents a price decline. Similarly, price increases are indicated by the intersection of short-term moving averages with price increases.
- Support and resistance levels
Using moving averages to identify support and resistance levels is very useful for traders. When the price of an asset is at its highest point, MA signals the trader to sell; Similarly, traders can use MA to identify support levels and buy when the price is falling. In some cases, historical resistance levels can become new support levels.
Use MA to determine the four stages of the market cycle
Traders can use moving averages (MA) to identify the four stages of a typical security market, providing traders with a trading strategy.
The first stage is the foundation and is where the market transitions from a major bear market to a major bull market. As the market prepares to rebound, this is an infrastructure period. As assets flow, the market moves sideways; Late sellers close their positions and early speculators enter.
Short-term MA prompts more favorable modes. At the same time, long-term MA continued to decline, but at a lower rate of change. The price of the security stopped falling at the key MA line to achieve a breakthrough.
The second stage is the rise, the price breaks through the original resistance area, forming a new upward trend. Traders are aware of an important turn in the tone of the market and start buying aggressively.
The price decline is short-lived and often does not fall to the MA line, which is reflected by the rapid upward trend of medium-term, long-term MA and short-term MA.
The third stage is to reach the top, the upward trend of the market slows down, and the asset unit is transferred from the early buyers to the latter buyers. This stage is characterized by the distribution of holdings from the savvy trader to the latecomer.
Short-term MA lost upward momentum, followed by medium-and long-term MA, the market began to flatten. When the price reaches its peak, it starts to trade instantaneously across the line and then starts to fall and enter a bear market.
The fourth stage is the decline, with asset prices falling at an increasingly rapid rate and entering a bear market altogether. The short-term and long-term MA begin to decline at a lagged acceleration rate. The price rally is short-lived and tends not to touch the MA line.