Different Types of Moving Averages for Traders

7 months ago forexsimulation 0

A moving average is described as a technical indicator that investors and market analysts use for determining a trend’s direction. It’s a sum of a financial security’s data points over a particular period, and the total divided by the data points to get an average or mean. It is known as a moving average because it is always being recalculated using the current prices.

Moving averages are among the most popular of the trend indicators. Like most indicators, you plot the moving average directly on the chart, and not in a different window. Depending on the calculation formula, there are various types of moving averages (MA)

  • Simple Moving average (SMA)
  • Exponential Moving Average (EMA)
  • Displaced moving average and others

Traders favor either the SMA or the EMA. The SMA averages the closing prices for the period it considers. For instance, the SMA (100) considers the previous 100 candles and does an average of the closing prices to plot its current value, etc.

For some traders, the EMA is on point and applies weight to current prices, thus reducing lag. In the long run, the trading strategy matters a lot. Some techniques work best with EMA’s instead of SMAs, or vice versa.

1.    Support and Resistance with Moving Averages

A moving average has excellent support and resistance. The longer the period that the moving average considers, the more robust the support and resistant area. On moving averages, prices act the same as it does in a classical trend line. Once the support is broken, it turns into resistance, and vice versa.

When you compare with classical support and resistance the support and resistance from moving averages is known as dynamic support and resistance, and is just as powerful. It moves in tandem with price, and because of their calculation, most traders use moving averages for trailing stops when they are riding trends.

Other traders use them for adding to a robust trend, and as a rule, the more a price comes to a moving average, the movement becomes weaker. It is not advisable to make use of a moving average for adding more to a trend more than twice. If the price manages to reach the trend again, it is not a strong trend.

2.    Exponential Moving Averages (EMAs)

EMAs minimize lag by applying more weight to the latest prices. The weighting applied to current prices depends on the moving average periods. EMAs are different form SMAs in that a single day’s EMA calculation is based on all the EMA calculations for the period before that particular day. To calculate a 10-day EMA, you need to have more than ten days’ worth of data.

To calculate the EMA, you first calculate the SMA for the first EMA value. Calculate the weighting multiplier and then the EMA per day between the first EMA value and the current day, using the price, multiplier and the previous EMA.

Displaced Moving Average (DMA)

A displaced moving average (DMA) is a moving average, which has been adjusted either forwards or backwards in time. This is an attempt to be able to forecast trends better or to fit an asset price movement better. In a chart, an MA can be displaced forward, which is known as a positive displacement. This forward displacement moves the MA towards the right. The MA can be displaced backwards, which is known as negative displacement and moves the MA to the left.

The moving average determines a trend’s direction so that when the price goes above the MA, that indicates an uptrend, and when below the MA, that price is deemed as below average and an indicator of a downtrend.

If a price moves through an MA, that indicates a trend change. If a price falls though the MA from upwards, that means the uptrend is done with and signals the start of a downtrend.

Conclusion

Moving Averages are excellent indicators of either down or uptrend. An MA system can show you a good trend, but remember a MA offers you the best market perspective. A simple interpretation is that the market is bullish when the price is above, and when the trend is bearish, the price is below.