Moving Averages (Indicators 1 of many)

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Moving Averages

September 04, 2019

What is a Moving Average? (MA)

Moving averages are indicators which are time delayed, price based and displayed over a set period of time. A moving average provides traders with several things: 1) MA are an excellent method of gauging momentum and confirming trends. 2) MA are often used to define areas of support and resistance. 3) MA are used to drown/smooth out the "noise" of the market while interpreting charts. Price and volume fluctuations can distort charts, but since MA are lagging averages they provide visual representations without the distortion. MA are calculated over a specific period of time and the average is taken. It can be 60 minutes, 60 days, 60 weeks or any other option the trader chooses. Moving averages are calculated in different manners. A five day simple moving average (SMA) adds up the five most recent daily closing prices and divides by five to create a new daily average. Each day's average is connected to the next to create a single pattern. EMA or Exponential moving averages are a little more complicated. They are calculated to weigh the most recent price changes more heavily. This means that EMA will react faster to price flux than SMA. Depending on the time frame the moving average is covering, it will react differently to market price change. A 20 day moving average will more closely reflect the actual price than a 100 day moving average. This difference in scale is important to investors of different styles.

Trading With MA (cross up/down)

One of the most popular strategies utilizing MAs is known as a CROSSOVER. An example of a crossover can be a PRICE crossover. This is when a price crosses either above or below a moving average and thus signaling a potential change in trend.

Golden Cross

Another method of using MA is to put two or more on a single chart, one longer and one shorter. When the short term (more reactive) MA crosses above the longer term MA it is a "buy signal" and it indicates the trend/price is shifting up. This crossing of short term above long term is known as the "golden cross"

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