Moving AverageHow To Use The Moving Average
The Moving average is one of the most widely used technical analysis tools, which is used to indicate the price trend movement based on past prices for a given period.
It is a math result calculated by the average price of a certain number of candles (within a selected period), thus allowing to linearly analyze the movement of the price without the "noise" caused by repeated and continuous price fluctuation.
The Moving average is extremely simple and easy to read, what you see is a simple line that follows the price trend.
If we want to make short term trading, we could use, for example, the 20 period moving average (the average of the last 20 candles) given that visually it is more attached to the movement of the candles and therefore with greater oscillations. While on the other hand if you want to do long term trading, you need to usea 200 period moving average.This offers little oscillations, and more detached from the candle movement.
There are different methods of calculating the moving average. The two most popular are the simple moving average, and the exponential moving average
Simple Moving Average (SMA)
The simple moving average is one that is characterized by the simplest but also the most reliable and used calculation. To compute just add the price type of the number of candles selected and divide the result by the number of the same candles. This way, the result of the average willbeapplied to the most recent index on the chosen time frame.
The Exponential Moving Average (EMA)
The exponential moving average however exceeds the limit of the simple moving average as it manages to keep the recent values smaller than the old ones;hence it is more influenced by the last candles.
How to use the Moving Average
Usually the Moving average is used to immediately identify the direction or trend of the chart. Traders who use it as entry signalslook out for a point when the price intersects with its moving average, which indicates a potentialtrendreversal.
Entry signals generated by the Moving average that a good trader needs to know:
Bullish Signal: When the price on your chart crosses from bottom to top of its moving average you get a valid long entry signal. This is often known as a golden cross.
Bearish Signal: When the price chart crosses from top to bottom of its moving average, this signals a Short entry. This is popularly called a dead cross.
Signals with the double moving average
Among investors there are those who prefer to use 2 or more Moving Averages with different periods. A short period(fast moving average) and a longer term(slow period). In this case we do not notice the relationship between the price and its moving average, but only the behavior of the two moving averages.
Abullish signaloccurs when the fastest moving average (the one with shorter period) cuts above the slow moving average (the longer one).
Abearish signaloccurs when the fast moving average cuts below the slow moving average.
Moving Average as support / strength
The ways to take advantage of the Moving Average really do not end there because it's also worth considering their use as possible supports and price resistance. Obviously this technique only works on long-term trading for example, a Moving Average of 200 periods. We advise not to use short periods and above all not to use short timeframes such as M5, M15, and M30.
Warning! These types of techniques mentioned as signals are to be considered as a support fordirection, and that most techniques should be used in combination with other conditions or signals that confirm the entry.