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Technical Analysis: How to use moving averages to your advantage

Technical Analysis: How to use moving averages to your advantage

By Crypto4light | crypto4light | 24 Mar 2023


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How to make the most of moving averages in technical analysis

The moving average is one of the easiest and most basic indicators, so this information will be especially helpful for people who are just starting out in technical analysis and don’t know much about it yet.

How does a moving average work?

Mathematically and statistically, a moving average is a function that is based on another function and averages values while smoothing out peaks. Here’s the same thing, but this time with a graph to help:

The chart shows the Simple Moving Average, which is the easiest moving average to understand (SMA). To figure out SMA for period n, you need to replace the point’s value with the average of the n values around it.

To figure out the moving average, it is already clear that you need to take an odd number of periods to average. Also, it’s clear that MA can’t be calculated for the last and first points because they don’t have “neighbors” to the right and left.

And the longer the period, the more the moving average will lag behind its ends and the slower it will respond to changes in price.

In addition to a simple moving average, there is also an exponential moving average (EMA), which is a more complicated method. We won’t tell her how to do the math. Anyone who wants to can look it up on Google.

To put it simply, EMA lowers the “weight” of old values in the sample and raises the “weight” of new values in the calculations. So, when the price goes up or down quickly, the EMA changes more quickly because the new values will pull the blanket over the old ones. SMA needs more time to figure out what’s going on.

These types of moving averages are the most basic ones. There are also DEMA and TEMA, which move with double and triple exponential smoothing, respectively. Moving SMA was built using the method of least squares, WMA-moving, in which weights are set for values of different prescriptions.

In general, a lot, but you only need to know the SMA and EMA to get some signals.

How to get signals from moving averages

There are different ways to trade with the MA:

* Analyze trends.

* Keep an eye out for corners.

* Look for levels of support and resistance.

* Use indicators at a high level.

Now, let’s talk about each kind of signal.

Analyze trends

The moving average is a good way to figure out where prices are going just by itself. Often, random price changes make it hard to figure out what’s going on in the market. The moving average makes price changes clearer.

Look at where things meet.

The heart of the method is to set up two moving averages with different time periods, like 15 days and 50 days, and wait for the shorter one to cross the longer one.

If the short moving average breaks through the long moving average from the bottom up, this is called a “golden cross” and is a sign that the market is going up because trading volume has gone up and the short moving average has caught changes that have not yet “reached” the long one. If, on the other hand, a short moving average breaks through a long one from top to bottom, this is called a “cross of death” and is a sign that prices are going down because the curve predicted the drop and shows this.

It’s important to choose the length of the moving averages through experimentation and for each asset separately. It’s best to do this with data from the past so you can see what worked and what didn’t.

If you choose moving averages that are very short, they will give you a lot of signals, but most of them will be wrong. If you take very long ones, the signals will be rare, high-quality, and late.

Support-resistance levels

Some traders see moving averages as levels of support and resistance, so when a price breaks out of one of these curves, it could be a sign that the price will go up or down.

For example, a bullish sign is when the price of an asset breaks through a long enough moving average from the bottom up. And if it goes down from the top, it’s bearish.

Again, the length of the moving average is different for each asset, and we choose it after the fact.

Moving averages of different time periods can also be used as corridors with levels of support and resistance. The resistance is stronger the farther you are from the middle of the corridor.

Use high-level measures.

Using moving averages is the basis for some indicators. Moving Average Convergence/Divergence (MACD), which measures how much the EMA values differ from each other, is the most popular of these.

The MACD is made up of three curves: the signal curve is the EMA with a period of 9, the MACD lines are the indicator itself, the difference between the EMAs 26 and 12, and the EMA with a period of 26. On the MACD chart, you can also see a histogram, which is made by taking the MACD line away from the signal curve.

Since there are more signals in the histogram, they come earlier. But, as you might expect, many of them are also false.

The essence of the indicator is that when the MACD line crosses the signal line from bottom to top, it’s a sign to buy, and when it crosses from top to bottom, it’s a sign to sell. So that you don’t come to the wrong conclusions, it’s best to check if the signal was right after a few trading periods. If the price moves the way the indicator said it would, it’s likely that the price will stay the same.

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