Every trader and investor in a financial markets makes their earnings by doing extensive research and using crucial indicators before each transaction. They benefit from technical analysis and the many indicators that help to gauge market trends and movements.
The Moving Average is one such indicator that can be used by many market participants. What is the Moving Average? How can you interpret the Moving Average to make informed trading decisions Let's take a closer look at the concept.
The Moving Average is basically a technical indicator. It is simply the average of several data points. This data typically represents the price points of security such as stocks and commodities. The Moving Average can be calculated by adding all the values for the security and then dividing it by the total number.
Because the indicator's value changes as the data (which is the stock's underlying price) changes over time, it is called a "moving average". The Moving Average is the average price action the security experienced over a specified time period, such as 10 minutes, or a week.
Understanding Moving Averages
The past prices of security determine the Moving Average meaning. It is a measure of the average asset price over a given time period. It can be used to indicate where the asset's price direction will go in the future. It smoothens price action and gives traders an indication of the overall price trend for the security.
If the Moving Average of a security is inclined upwards, it means that its prices are rising or have been rising in recent times. This indicates an upward trend. A Moving Average that is downward-angled indicates a decline in price or a downtrend.
Additionally, Moving Averages closely track historical price movements and can help establish support or resistance levels. The Moving Average is used by traders to determine if the price is moving towards it or bouncing back from the established support/resistance level. They can also be used to help traders identify entry and exit points for certain securities.
Based on trader's individual goals, the length of Moving Averages may be modified. Short-term trading can use short Moving Averages such as those that last 30 days. Long-term investments, however, can use long Moving Averages (e.g. those that are extended for more than 200 days).
Types of moving averages
Although Moving Averages are useful indicators for most market participants, they may not be the same type of Moving Average. There are three main types of Moving Averages:
– Simple Moving Average The Simple moving average is the most common form of Moving Average used in technical analysis. It is calculated by taking the average of a number of values (mostly prices for a security) then dividing it by the number. You can calculate it as follows:
(A1 + a2 + a3 +...An) / = SMA
Where n is the number time periods, and A is the average time period.
Simple Moving Averagetracking is most popular for periods of 8, 20, 5, 100, and 200 days.
Exponential Moving Average The Exponential Moving Average is the other type of Moving Average. This weighted method of calculating Moving Averages gives recent prices more weight than previous price values. The trader must first establish the Simple Moving Average of the security prices in order to calculate the Exponential Moving Average Value. The formula below gives decreasing weightage to this value for each period.
Exponential Moving Averages respond faster and better to price changes than the Simple Moving Average.
The Moving Average allows traders to quickly and easily understand current market trends. Because they take into account past price movements, Moving Averages can be used by traders to forecast future price direction before they make a transaction. It is important to use Moving Averages in conjunction with other indicators to get a complete picture of market opportunities.