Moving Average (MA): Complete Guide on How to Use MA in Trading

Moving Average (MA): Complete Guide on How to Use MA in Trading

What Is a Moving Average (MA)?

In measurements, moving normally is a figure used to examine data focuses by making a progression of averages of various subsets of the full data set. In finance realm, Moving Average (MA) is an indicator that is widely used in technical analysis. The explanation behind figuring the moving average of an asset is to help smooth out the price data by making a continually average price.

Understanding Moving Average (MA)

Moving averages are usually calculated to identify the trend direction of an asset or to determine its Support and Resistance levels. It is a trend-following—or lagging—indicator because it is based on past prices. The longer the time period for the moving average, the greater the lag. So, a 100-day moving average will have a much greater degree of lag than a 10-day MA because it contains prices for the past 100 days. Traders may choose different time periods of varying lengths to calculate moving averages based on their trading objectives. Shorter moving averages are typically used for short-term trading, while longer-term moving averages are more suited for long-term investors.

Simple Moving Average vs. Exponential Moving Average

Simple moving average (SMA) calculates the average of a selected range of prices, usually closing prices, by the number of periods in that range. The SMA is a technical indicator that can aid in determining if an asset price will continue or reverse a bull or bear trend. The SMA can be enhanced as an exponential moving average (EMA) that more heavily weights recent price action.

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The Exponential Moving Average (EMA) indicator is a moving average that places a greater weight and significance on the most recent data points. Like all moving averages, this EMA technical indicator is used to produce buy and sell signals based on crossovers and divergences from the historical average. Traders often use several different EMA lengths, such as 10-day, 50-day, and 200-day moving averages to have a better understanding of the market.

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So what are the difference between EMA and SMA? The major difference is the sensitivity each one shows to changes in the data used in its calculation. More specifically, the EMA gives higher weights to recent prices, while the SMA assigns equal weights to all values. The two averages are similar because they are interpreted in the same manner and are both commonly used by technical traders to smooth out price fluctuations.

Since EMAs place a higher weighting on recent data than on older data, they are more responsive to the latest price changes than SMAs. That makes the results from EMAs more timely and explains why they are preferred by many traders.

How to Use Moving Averages to Find the Trend

One sweet way to use moving averages is to help you determine the trend. When price action tends to stay above the moving average, it signals that price is in a general UPTREND. If price action tends to stay below the moving average, then it indicates that it is in a DOWNTREND.

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The problem with this is that it’s too simplistic. Let’s say that BTC/USDT has been in a downtrend channel, but suddenly a news report comes out causing it to surge higher like what shows in the below chart. You see that the price is now ABOVE the moving average. And you buy it.

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But as it turns out, all traders just reacted to the news but the overall trend continued and the price kept heading lower.For this kind of situation, what are some experienced traders do? They plot a couple of moving averages on their charts instead of just ONE. These different MA lines could give them a clearer signal of whether the pair is trending up or down depending on the order of the moving averages.

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In an uptrend, the “faster (shorter-term)” moving average should be above the “slower (Longer-term)” moving average and for a downtrend, vice versa. For example you can see from the chart below, let’s say we have two MA lines: a 10-period MA line in orange and a 20-period MA line in purple. On your chart, it would look like this:

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Throughout the uptrend, the 10 MA is above the 20 MA. As you can see, you can use Moving Averages indicator to help you analysis whether a pair is trending up or down. By combining this with your knowledge on trend lines, this can help you decide whether to go long or short a trading pair. You can also try putting more than two moving averages on your chart. Just as long as lines are in order (faster MA over slower MA in an uptrend, slower MA over faster MA in a downtrend), then you can tell whether the pair is in an uptrend or in a downtrend.

Key Takeaways

  • Moving Average (MA) is an indicator that is regularly utilized in technical analysis.
  • The reason for calculating the moving average of an asset is to help smooth out the price data over a specified period of time by creating a constantly updated average price.
  • A simple moving average (SMA) is a calculation that takes the arithmetic mean of a given arrangement of price over the particular number of days before; for instance, over the past 15, 30, 100, or 200 days.
  • Exponential moving average (EMA) is a weighted average that gives more noteworthy significance to the price of a stock on later days, making it a pointer that is more receptive to new data.
  • Adding multiple different period MA lines could help you better analysis the uptrend or downtrend of the trading pairs.

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