Moving averages are also called moving averages. This is a basic tool that you can grasp easily. This can be used in analyzing market trends.
When participating in any market. As a trader or an investor. In order to find out trading opportunities, you need to predict market trends.
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What is the MA (moving average line)?
Moving average (MA) or moving average is the most popular technical analysis tool used to check price movements.
Like technical indicators, moving averages help traders predict future prices. It is popular with traders because it can help determine the direction of the current trend. Also reduces the impact of random price increases.
Calculating the MA requires a large amount of data. Data is large or small depending on the length of the MA. For example 10 days, it needs 10 days data. A year needs data of 365 days.
How many types of moving averages does MA have?
There are two most popular MA moving averages:
- Simple moving averages (SMA).
- Moving averages exponentially (EMA).
Let's analyze each MA line:
Simple moving average MA (SMA)
This is the simplest and most basic MA line, which is just taking data from a period of time and calculating the average of a set of prices over that period. At the end of each day the oldest data point is deleted and the data point is added to the beginning.
Specifically, the formula is as follows:The total price closed in N time / N.
For example: SMA (3) with a closing price calculated as 3, 4, 5, then SMA (3) = (3 + 4 + 5) / 3 = 4.
Moving average MA exponential moving average (EMA)
EMA based on past price movements. With the EMA the old data points never leave the average. Old data points retain a multiplier (albeit down to almost nothing) even if they are outside the chosen data series length.
Compared to SMA, the EMA has a faster response rate for price changes (or price reversals) and has a more complex calculation equation.
Currently, with the development of software or tools, you do not need to care much about the formula for calculating these indicators. Just understand the meaning or nature of it to use effectively. As for the calculation and display of how the software has taken charge.
Assess the advantages and disadvantages of SMA and EMA
This question is almost everyone who uses the MA line. Differences or advantages and disadvantages will give you a most specific assessment. Thereby the choice also affects quite a lot of transactions.
- The reaction speed of the SMA is slow so it eliminates the noise of short-term fluctuations.
- SMA is often favored by analysts who use long time frames such as daily or weekly chart frames (long term).
- The weakness of the SMA is its slower response to rapid price changes that often occur at market reversals.
- May not accurately reflect the most recent trends.
- The faster response speed for price changes than SMA by balancing price changes. The signal trend of the EMA is faster than the SMA so this is good for traders at points swing high , and swing low.
- EMAs are commonly used by traders who are trading on short timeframes such as minute charts, hourly charts (short-term).
- EMA speed and sensitivity is also its drawback. Because of high sensitivity, it is easy to give false signals when the market fluctuates sharply.
What is the purpose of the MA?
The main purpose is often used for determining the direction of market trends. Identify support and resistance. The moving average usually acts as a resistance when the price is trading below the MA and it acts as a support when the price is trading above the MA.
Another benefit of moving averages is that it is a customizable indicator. This means that a trader can choose a time frame that is appropriate for the trading objective.
It is also important to choose the number of periods for an MA moving average because it affects the efficiency when used. People often use the following stages:
- Short term (MA line for 5-25 days)
- Medium term (MA line for 26-100 days)
- Long term (MA line for 100-200 days)
For each specific purpose, the moving average is applied as follows:
When prices are trending up, the MA also tends to rise to indicate that prices are rising. Coming here is a trading opportunity for you. It means that you can open a long position.
To do this, you just need to open an MA line on the chart, when the price is above the MA it is a sign of an uptrend and vice versa. However, there are still some tricks that you have to pay for to experience.
Identify support and resistance
The MA line is used to identify support and resistance levels after a trader has placed a trade.
There are many forex traders who consider these moving averages to be major support or resistance. These traders will buy when the price falls and check the moving average or sell if the price rises and touches the MA.
Below description: EURUSD chart at 15-minute frame and EMA 50 act as support level:
Determine the entry point by the MA cross
Each moving average has a different value at each time. In an uptrend, a long-term MA from the upward cuts a point with the short-term MA. Contrary to the downtrend.
But the problem is which MA lines you have to use for this. The choice also takes time and experience. Or turn on all the lines you use or use and observe, kkk.
In short, a technical analysis tool, whether or not the lungs, needs to be tested. That test includes time, effort and property in exchange for experience.
In addition to grasping the moving averages, you should explore and combine many different indicators to give an accurate investment plan or opportunity. Wish success.